Page 113 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

Unit 9: Economic Effects of Tariff and Quotas on National Income, Output and Employment

(iii) U.S. exports: Notes
(a) average 4-6 percent of GDP, as do imports
(b) average 18-20 percent of GDP, while imports average 10-12 percent
(c) average 10-12 percent of GDP, while imports average 15-17 percent
(d) average 1-2 percent of GDP, while imports average 4-6 percent
(iv) Two nations, Gamma and Delta, both produce shoes and dresses. Gamma has a comparative
advantage in the production of shoes if:
(a) it can produce shoes with fewer resources than Delta
(b) its domestic opportunity cost of shoes in terms of dresses is lower than Delta's
(c) its supply of shoes is greater than Delta's
(c) it is wealthier than Delta
(v) A decrease in the U.S. demand for Mexican goods will:
(a) increase the demand for the peso and increase its dollar price
(b) increase the supply of the peso and decrease its dollar price
(c) decrease the supply of the peso and increase its dollar price
(d) decrease the demand for the peso and decrease its dollar price
(vi) One major outcome of the North American Free Trade Agreement is:
(a) massive investment by Asian companies in Mexico to exploit reduced tariffs
(b) increased unemployment in Mexico
(c) higher average living standards in Canada, Mexico, and the U.S.
(d) reduced exports from the U.S. to Mexico and Canada
9.3 Summary

• A tariff is simply a tax or duty placed on an imported good by a domestic government. Tariffs
are usually levied as a percentage of the declared value of the good, similar to a sales tax.
Unlike a sales tax, tariff rates are often different for every good and tariffs do not apply to
domestically produced goods.
• The cost of tariffs to the economy is not trivial. The World Bank estimates that if all barriers to
trade such as tariffs were eliminated, the global economy would expand by 830 billion dollars
by 2015. The economic effect of tariffs can be broken down into two components.
• It is easy to see why a foreign tariff hurts the economy of a country. A foreign tariff raises the
costs of domestic producers which causes them to sell less in those foreign markets.
• There are costs to tariffs, however, now the price of the good with the tariff has increased, the
consumer is forced to either buy less of this good or less of some other good. The price increase
can be thought of as a reduction in consumer income. Since consumers are purchasing less,
domestic producers in other industries are selling less, causing a decline in the economy.
• Generally the benefit caused by the increased domestic production in the tariff protected industry
plus the increased government revenues does not offset the losses the increased prices cause
consumers and the costs of imposing and collecting the tariff. We haven't even considered the
possibility that other countries might put tariffs on our goods in retaliation, which we know
would be costly to us. Even if they do not, the tariff is still costly to the economy.
9.4 Key-Words

1. Tariff policies : A tariff policy is a strategy of taxing imported or exported goods and
services from one country to another. These taxes often seek to protect
domestic industries or punish countries for policies related or unrelated
to the economy. Considered by friendlier countries to be a barrier to

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