Friday, August 28, 2009
A tarrif is a tax levied on imports. It is synonymous with import duties or custom duties. Tarrifs are used for two different purposes for revenue and for protection. Revenue tarrifs are meant to provide the state with revenue. Revenue duties are levied on luxury consumer goods. Protection Tarrifs are meant “to maintain and encourage those branches of home industry protected by the duties.
Effects of Tarrifs on the Terms of Trade under General Equilibrium:
The terms of trade effect of a tarrif is that a country imposing a tarrif improves its terms of trade. It can get its imports more cheaply because the foreign importer is forced to pay more part of the duty of the whole of it. But the extent to which the terms of trade of the tarrif imposing country improve depends upon the reciprocal demand of the two countries. Suppose there are two countries
Here OE and OG are the offer curves of
(a) Terms of trade effects without retaliation: The imposition of a tarrif by a country when the other country does not retaliate has two effects, first the tarrif imposing country improves its terms of trade. It gets its imports more cheaply because the foreign exporter is forced to pay some part of the duty or the whole of it. Second the tarrif tends to reduce the volume of trade.
Suppose there are two countries
Under free trade the offer curves OG and OE intersect at point T indicating that CC cloth of
On the other hand, if the offer curve of
Under free trade the terms of trade of the two countries are depicted by the OT line and they exchange OC of cloth for OL of linen. Between A and B the offer curve of Germany OG is highly inelastic. With the imposition of a tarrif the offer curve of England OE1 crosses OG at point B so that the new terms of trade line is OT1. This shows an improvement in the terms of trade of
(b) Terms of trade effect with retaliation: The normal situation in international trade is not one of improving its terms of trade by one country by imposing a tarrif, while the other country sustains the loss without any counter action. Infact if
FIG 18The free trade offer curves of
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