Question

Tariff effects: An overview

Consider two hypothetical countries, Alagir and Ertil. Both countries produce iGadgets, and the price of iGadgets is lower in Alagir than in Ertil. If Alagir and Ertil open to trade, producers in would be more likely to lobby their government for an import tariff on iGadgets in order to protect themselves from foreign competition.
Which of the following statements about the effects of the tariff compared to free trade are correct?
A. In Alagir, workers in iGadget importing companies lose their jobs.
B. In Ertil, some workers at retail and shipping companies that import iGadgets lose their jobs.
C. In Ertil, consumers pay more for the domestic iGadgets.
D. In Ertil, workers in iGadget importing companies see more jobs available to them.
E. In Ertil, producers of iGadgets are willing to expand output.

Answer 1

1. If Alagir and Ertil open to trade, producers in Ertil would be more likely to lobby their government for an import tariff on iGadgets in order to protect themselves from foreign competition.

Producers in Ertil would be at a disadvantage because people in Ertil would simply buy the lower priced iGadgets from Alagir so the producers in Ertil would lobby their Government for tariffs to protect them.

2.

B. In Ertil, some workers at retail and shipping companies that import iGadgets lose their jobs.

If an import tariff is imposed, people will find the goods from Alagir more expensive and so will import less. The companies who did the shipping and retail of the goods from Alagir would have to let go of some people to save costs or because they would close down.

C. In Ertil, consumers pay more for the domestic iGadgets.

With tariffs to protect them, the domestic producers in Ertil can charge higher prices.

E. In Ertil, producers of iGadgets are willing to expand output.

With the tariff protecting them, the producers will be willing to expand output so that they can sell more iGadgets at the new higher price.