Basic Tariff analysis Effects of a Tariff Assume that two large countries trade with each other Suppose Home imposes a tax of S2 on every bushel of wheat imported Then shippers will be unwilling to move the wheat unless the price difference between the two markets is at least $2 Figure 8-4 illustrates the effects of a specific tariff of St per unit of wheat Copyright C 2003 Pearson Education, Inc Slide 8-16
Copyright © 2003 Pearson Education, Inc. Slide 8-16 ▪ Effects of a Tariff • Assume that two large countries trade with each other. • Suppose Home imposes a tax of $2 on every bushel of wheat imported. – Then shippers will be unwilling to move the wheat unless the price difference between the two markets is at least $2. • Figure 8-4 illustrates the effects of a specific tariff of $t per unit of wheat. Basic Tariff Analysis
Basic Tariff Analysis Figure 8-4. Effects of a Tariff Home market World market Foreign market Price, P Price, P Price, P XS T MD D Quantity,Q QT Qw Quantity, Q Quantity Q Copyright C 2003 Pearson Education, Inc Slide 8-17
Copyright © 2003 Pearson Education, Inc. Slide 8-17 XS PT MD D* S* D S PW 2 QT 1 QW Basic Tariff Analysis Figure 8-4: Effects of a Tariff P* T 3 t Price, P Quantity, Q Price, P Quantity, Q Price, P Quantity, Q Home market World market Foreign market Foreign market
Basic Tariff analysis In the absence of tariff, the world price of wheat (P would be equalized in both countries With the tariff in place, the price of wheat rises to PT at Home and falls to P*TPr-t at Foreign until the price difference is St In Home: producers supply more and consumers demand less due to the higher price, so that fewer imports are demanded. n Foreign: producers supply less and consumers demand more due to the lower price, so that fewer exports are supplied. Thus, the volume of wheat traded declines due to the imposition of the tariff Copyright C 2003 Pearson Education, Inc Slide 8-18
Copyright © 2003 Pearson Education, Inc. Slide 8-18 • In the absence of tariff, the world price of wheat (Pw ) would be equalized in both countries. • With the tariff in place, the price of wheat rises to PT at Home and falls to P* T (= PT – t) at Foreign until the price difference is $t. – In Home: producers supply more and consumers demand less due to the higher price, so that fewer imports are demanded. – In Foreign: producers supply less and consumers demand more due to the lower price, so that fewer exports are supplied. – Thus, the volume of wheat traded declines due to the imposition of the tariff. Basic Tariff Analysis
Basic Tariff analysis The increase in the domestic Home price is less than the tariff, because part of the tariff is reflected in a decline in Foreign's export price If Home is a small country and imposes a tariff the foreign export prices are unaffected and the domestic price at Home(the importing country) rises by the full amount of the tariff. Copyright C 2003 Pearson Education, Inc Slide 8-19
Copyright © 2003 Pearson Education, Inc. Slide 8-19 • The increase in the domestic Home price is less than the tariff, because part of the tariff is reflected in a decline in Foreign’ s export price. – If Home is a small country and imposes a tariff, the foreign export prices are unaffected and the domestic price at Home (the importing country) rises by the full amount of the tariff. Basic Tariff Analysis