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Principles of Macroeconomics (Mind...

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

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BuyFindarrow_forward

Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509
Chapter 9, Problem 6CQQ
Textbook Problem
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The main difference between imposing a tariff and handing out licenses under an import quota is that a tariff increases

a. consumer surplus.

b. producer surplus.

c. international trade.

d. government revenue.

To determine
How tariff and the import quota differ.

Explanation of Solution

International trade is the exchange of goods and services between different nations in the world. The exchange will take place where the two main processes are exports and imports. Exports are the sale of domestic goods to foreigners and imports are the purchase of foreign goods by the domestic country.

Option (d):

When the quota is determined, the importing will be limited to the quota quantity. The economy cannot import above the quota limit; this will help domestic producers. But when the quota is replaced by the tariff, it will increase the price of the commodity and the revenue of the government. It also reduces the quantity of imports due to increased prices. Thus, both the quota and the  tariff do the same work but the tariff increases the government revenue; this is the main difference between the two. Thus, optiondis correct.

Option (a):

When the quota is determined, the importing will be limited to the quota quantity. The economy cannot import above the quota limit; this will help the domestic producers. But when the quota is replaced by the tariff, it will increase the price of the commodity and the revenue of the government. It also reduces the quantity of imports due to increased prices. Thus, both the quota and the tariff lead to a reduction in imports which reduces the consumer surplus, and so optionais incorrect...

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