Q Explain in detail the effects of an import tariff on the economic welfare of the small country Home, - Evaluate the effects of an import tariff Question: Instruments of Trade Policy i. Evaluate the effects of an import tariff by the government of a small country. Explain in detail the effects of an import tariff on the economic welfare of the small country. ANSWER: i. When a small country implements a special tariff, it increases the domestic price of the service or the commodity by the full amount of the tariff. The following are the effects of the tariff on the welfare of the small country - 1. Effects on the importing nations consumers - as a result of the implementation of the tariff, the situation of the consumers get worse and as the domestic prices of the imported goods increases thereby reducing consumer surplus existing in the market 2. Effects on the importing nations producers-as a result of the implementation of the tariff, the situation of the producers get better as the domestic prices of the products and offerings increases thereby increasing producer surplus within the industry 3. Effect on the government of the importing country-implementation of tariff is a direct government revenue for the small country. These funds generated by deployed in supporting diverse development programmes across the nation 4. Effect on the importing country-the welfare effect can be calculated by summing up the gains resulting to consumers, the government and the producers. The net welfare effect due to the implementation of tariff for the small country Is negative. ii. Describe the potential advantages to the economy if the government offers an export subsidy ii. When export subsidies are implemented by exporting nations, the prices of the domestic goods will increase accompanying a similar decline in the price of the goods prevailing in the rest of the world. The welfare effect of export subsidies are given as under- 1. Effect on the consumers of exporting country-due to implementation of export subsidies, the domestic price of the products would increase thereby lowering consumer surplus prevailing in the market. 2. Effect on the producers of the exporting country - due to implementation of export subsidies, the well-being of the producer community shall increase due to increase in the product prices. 3. Effect on the government of the exporting country-export subsidy implies the liability of the government to make subsidy payment to the exporters. This food allow cash outflow from the government budget and hence there would be reduced execution of government spending programmes on the development of the nation Related: Describe the gravity model Discuss the standard model of trade Describe the role of World Trade Organization Evaluate the effects of an import tariff Describe the four market structures
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