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Suppose that Congress imposes a tariff on imported automobiles to protect the U.S. auto industry from foreign competition. Assuming that the United States is a price taker in the world auto market, show the following on a diagram: the change in the quantity of imports, the loss to U.S. consumers, the gain to U.S. manufacturers, government revenue, and the deadweight loss associated with the tariff. The loss to consumers can be decomposed into three pieces: a gain to domestic producers, revenue for the government, and a deadweight loss. Use your diagram to identify these three pieces.

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Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509

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Section
BuyFindarrow_forward

Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509
Chapter 9, Problem 2PA
Textbook Problem
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Suppose that Congress imposes a tariff on imported automobiles to protect the U.S. auto industry from foreign competition. Assuming that the United States is a price taker in the world auto market, show the following on a diagram: the change in the quantity of imports, the loss to U.S. consumers, the gain to U.S. manufacturers, government revenue, and the deadweight loss associated with the tariff. The loss to consumers can be decomposed into three pieces: a gain to domestic producers, revenue for the government, and a deadweight loss. Use your diagram to identify these three pieces.

To determine
The impact of tariff on automobiles.

Explanation of Solution

The international trade is the exchange of goods and services between different nations in the world. The exchange will take place and the main two processes are the export and imports. The exports is the sale of domestic goods to the foreigners and imports is the vice versa. When there is no tariff, the price will be equal to world price. This will increase the quantity demanded and will increase the imports whereas the tariffs will reduce the imports and quantity demanded because it increases the price level of the economy. This can be illustrated as follows:

From the graph above, we can easily identify that the price level without the tariff was PW which is equal to the world price, quantity demanded was Q1D and quantity supplied was Q1S. The difference between the demand and supply was imported by the country at the world price of PW.  When there is tariff imposed on the imports, the price level increases by the tariff and the new quantity demanded is Q2D and new quantity supplied is Q2S. This shows that the quantity demanded have fallen, whereas the quantity supplied have been increased. Thus, the difference between the quantity demanded and quantity supplied falls which means the import falls...

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