Question

Suppose a large economy imposes a $5 tariff on a good. The world price of the good (excluding the tariff) falls from $20 to $18. Imports fall from 100 units to 60 units. The terms-of-trade gain is ---- and the efficiency loss is ----. (Assume linear supply and demand curves.)

Answer 1

Solution and Explanation:

The given data:

Tariff on goods = $5

Change of price = from $20 to $18

Import falls from 100 units to 60 units

As per the given data, the terms of trade can be calculated as follows:

Terms of trade gain = $(previous price - present price) * present imports$

$=(20-18) * 60$ = $2 * 60$

= 120

Therefore, the terms of trade gain is $120

The efficiency loss is calculated as follows:

$Efficiency loss =\frac{1}{2} (Previous price - present price) ^{*} Imports at present$

$=\frac{1}{2}(20-18)^{*} 60$ $=\frac{1}{2}(2)^{*} 60$

= 60

Therefore, efficiency loss = $60