The correct answer is option C: “not change.”

When a small country imposes a tariff on an imported good, its terms of trade remain unaffected. To understand why this is the case, let’s break down the concepts involved and explain why the other options are not correct.

Terms of Trade:

The terms of trade refer to the ratio at which a country can exchange its exports for imports. It is typically expressed as the price of a country’s exports relative to the price of its imports.

An improvement in a country’s terms of trade means that it can obtain more imports for a given quantity of exports, while a worsening of terms of trade means it can obtain fewer imports for the same quantity of exports.

Now, let’s address each option:

Option A:

Improve This option suggests that imposing a tariff would lead to an improvement in the country’s terms of trade. However, this is not the case, especially for a small country. When a country imposes a tariff on imported goods, it effectively increases the price of those goods for domestic consumers.

As a result, the country’s consumers end up paying higher prices for imported products. In response, foreign exporters may reduce their prices to maintain market share in the country. This, in turn, can lead to a situation where the terms of trade do not significantly change.

Even if foreign exporters do not reduce their prices, the imposition of tariffs primarily affects domestic consumers by making imported goods more expensive, which does not necessarily lead to an improvement in the terms of trade.

Option B:

Worsen This option suggests that imposing a tariff would lead to a worsening of the country’s terms of trade. While this outcome might seem intuitive, it is not accurate. A tariff primarily impacts domestic consumers by raising the price of imported goods. It may reduce the quantity of imports, but it does not necessarily worsen the terms of trade.

In fact, if the tariff succeeds in reducing imports significantly, it may lead to a decrease in the quantity of exports required to pay for the imports, which could be interpreted as an improvement in the terms of trade. However, it’s important to note that the impact on terms of trade is typically minor and indirect, especially for a small country.

Option D:

Any of the above This option suggests that the impact on terms of trade could be either an improvement or a worsening, depending on the specific circumstances.

While it is possible for a country’s terms of trade to be affected by various factors, imposing a tariff alone, particularly in the case of a small country, is unlikely to result in a significant change in the terms of trade. Instead, tariffs primarily affect the domestic price of imported goods and the quantity of imports, but their direct impact on the terms of trade is limited.

In summary, when a small country imposes a tariff on an imported good, its terms of trade are unlikely to change significantly. The main effects of the tariff are higher prices for imported goods and potentially reduced quantities of imports, but these factors do not necessarily lead to a substantial alteration in the country’s terms of trade.

Terms of trade are influenced by a wide range of economic factors, and a single tariff policy is just one of many factors that can affect them.