Economic Economy : The Global Economy

1024 Words Dec 15th, 2015 5 Pages
Formative: The Global Economy
Topic: Show how the imposition of a tariff by a small country will have a consumption effect, a production effect, a government revenue effect, and a trade effect on the economy of that country.

“If the country is a ‘small country’ in international markets, then the policy-setting country has a very small share in the world market for the product—so small that domestic policies are unable to affect the world price of the good”. (Suranovic, 2010, pg. 296). Hence the small country is a ‘price-taker’ and not a ‘price-maker.’ A tariff is a tax or duty levied on the imported commodity when crossing an international boundary. (Salvatore, 2012, pg. 113). Tariffs are one of the easiest ways for governments to collect
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Due to import, the gap between quantity demanded and quantity supplied is filled. The consumer surplus due to this will be £1250. “Consumer surplus is the difference between what consumers are willing to pay for a specific amount of a commodity and what they actually pay for it”. (Salvatore, 2012, pg. 117). The producer surplus will be £25. “Producer surplus is defined as the difference between the amount the producer is willing to supply goods for and the actual amount received by him when he makes the trade”. (The Economic Times 2015)

Due to imports, the price of commodity X will decrease, resulting in a situation where this small country will impose a tariff. This effect is often the tariff’s principle objective- to protect domestic producers from the low prices that would result from import competition. (Krugman & Obstfeld, 2003, pg. 190). The government can impose an ad valorem (on the value) tariff, which is a percentage of the estimated market value of the goods when they reach the importing country. (Pugel, 2007, pg. 129).
When there is an ad valorem tariff imposed, a specific percentage of the price of commodity X will go to the government. This has been illustrated in figure 3. If the nation imposes a 100 percent ad valorem tariff on the imports of commodity X, the Price of X will rise to £20, as £10 will be the price and £10 will be the tariff going to the custom
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