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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

Which of the following trade policies would benefit producers, hurt consumers, and increase the amount of trade?

a. the increase of a tariff in an importing country

b. the reduction of a tariff in an importing country

c. starting to allow trade when the world price is greater than the domestic price

d. starting to allow trade when the world price is less than the domestic price

To determine
The policy which hurts consumers and helps producers and increases trade.

Explanation

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.

Option (c):

When the domestic price of the commodity is lower than the price in the foreign countries, it denotes that the domestic country is able to produce the good at lower opportunity cost than the foreign countries. As a result, the domestic goods will be cheaper in the international market. When the trade opens up, the domestic price will be replaced by the international price due to price mechanism. As a result, the domestic price increases. This increase in the domestic price level hurts the consumers through reducing the consumer surplus and benefits the producers because it increases the producer surplus. The demand will increase for the commodity in the international market and this will increase the total trade of the commodity. Thus, option 'c' is correct.

Option (a):

When the importing country imposes a tariff on the imports, it will increase the domestic price which will hurt the consumers and benefits the producers but as a result of the increased price, the demand will fall and the quantity imported will also fall which means that the amount of trade will fall...

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