If a country an imposes an import tariff its welfare can improve if

 Options:

The Correct Answer Is:

b. its terms of trade improve enough

Let’s break down the options and explain why each one is correct or incorrect in detail.

Correct Answer: b. its terms of trade improve enough

When a country imposes an import tariff, it essentially increases the cost of imported goods. This can lead to several outcomes, one of which is an improvement in the country’s terms of trade. Terms of trade refer to the ratio at which a country can exchange its exports for imports.

If the tariff is effective in reducing imports, it can lead to a decrease in the supply of foreign currency in the country’s foreign exchange market. This, in turn, can lead to an increase in the value of the country’s currency relative to foreign currencies.

A stronger domestic currency means that the country can buy more imports with the same amount of exports, effectively improving its terms of trade.

Why the Other Answers are Incorrect:

a. the country is a “small country” rather than a “large country”

This statement refers to the distinction between a “small country” and a “large country” in international trade theory.

In trade theory, a “small country” is one that is unable to influence world prices through its trade policies, meaning it takes prices as given in the world market. Conversely, a “large country” can potentially affect world prices through its trade policies.

However, this distinction is not directly related to the impact of imposing an import tariff on a country’s welfare.

Whether a country is small or large, the imposition of an import tariff will have specific effects on its economy, such as potentially raising the prices of imported goods for consumers and protecting domestic industries from foreign competition.

The size of the country may affect the magnitude of these effects, but it does not determine whether the welfare of the country will improve as a result of the tariff.

c. the tariff enhances the welfare of its trading partners

This statement is unlikely to be true in most cases. When a country imposes an import tariff, it is generally done to shield domestic industries from foreign competition. While this may benefit domestic industries, it often comes at the expense of the welfare of trading partners.

The tariff can lead to reduced export opportunities for trading partners, which can negatively impact their economies. Therefore, the welfare of trading partners is usually adversely affected rather than enhanced by the imposition of an import tariff.

d. its government’s tax revenue increases because of the tariff

While it is true that imposing an import tariff leads to an increase in government tax revenue, this alone does not necessarily translate to an overall improvement in welfare.

The welfare of a country’s citizens depends on a variety of factors, including changes in consumer and producer surpluses, alterations in the terms of trade, and potential retaliatory measures from trading partners.

Additionally, an increase in government revenue through tariffs may not always be spent in a way that maximizes the overall welfare of the country. It depends on how the government allocates and utilizes the additional revenue, which can vary widely based on political and economic circumstances.

In summary, while options a, c, and d may have some relevance in specific contexts, they do not directly address the primary factors that determine whether a country’s welfare can improve when it imposes an import tariff. The most significant factor is the improvement in the country’s terms of trade, which is why option b is the correct answer.

Related Posts

• Under a tariff-rate quota:
• From the perspective of the American public as a whole export subsidies levied by overseas governments on goods sold to the United States: