Question

Should the home country be "large" relative to the world, its imposition of a tariff on imports would lead to an increase in domestic welfare if the terms-of-trade effect exceeds the sum of the:_________

a. revenue effect plus redistribution effect.
b. protective effect plus revenue effect.
c. consumption effect plus redistribution effect.
d. production distortion effect plus consumption distortion effect.
e. None of the above.

Answer 1

Option e. is correct

Step-by-step explanation:

The Terms of Trade is equal to the average price of exports / by the average price of imports. The terms-of-trade refers to the relative price of exports in terms of imports.

Protective effect refers to the wasted resources due to production of good at a higher cost. Consumption effect refers to the loss to consumer due to higher price that leads to less consumption.

Should the home country be "large" relative to the world, its imposition of a tariff on imports would lead to an increase in domestic welfare if the terms-of-trade effect exceeds the sum of the protective effect plus consumption effect