Unit 9: International Trade, Tariffs, and the Case Against Protectionism
What a country's price does the moment it opens to world trade, the four pieces of a tariff's welfare cost, and why economists mostly reject import quotas.
5 topics · 17 questions
Each topic is a path, not a menu: work down it in order and every question builds on the one above. Click any of them to watch the answer draw itself.
The World Price and Opening a Market to Trade
- How it worksHow does comparing the world price to the no-trade domestic price decide whether a country becomes an exporter or an importer?
- Worked exampleFind whether a country becomes an importer or exporter of steel if its no-trade price is 700 dollars a ton and the world price is 500 dollars a ton.
- Common mistakeWhy doesn't a country need a comparative advantage in a good to still benefit from trading it?
Your turn1 of 2
Find how many dollars the world price differs from the no-trade domestic price, when the no-trade price is 739 dollars a ton and the world price is 480 dollars a ton.Winners and Losers from Opening to Trade
- How it worksHow does becoming an importer raise consumer surplus by more than it lowers producer surplus, leaving total surplus higher?
- Common mistakeWhy doesn't the fact that trade creates losers as well as winners mean trade makes a country worse off overall?
- Going furtherWhat happens to producer and consumer surplus in a country that becomes an exporter instead of an importer?
Your turn1 of 2
Becoming an importer of a good raises consumer surplus by 129 dollars while lowering producer surplus by 56 dollars. What is the net gain in total surplus?A Tariff's Four Welfare Areas
- How it worksHow does a tariff split its effect into a loss to consumers, a gain to producers, a gain in government revenue, and two deadweight-loss triangles?
- Worked exampleWalk me through a tariff of 50 dollars a ton on steel and how it shrinks imports while raising the domestic price.
- Worked exampleFind the change in consumer surplus, producer surplus, and government revenue from a 50 dollar per ton tariff that cuts steel imports from 40 tons to 25 tons.
- Common mistakeWhy doesn't the tariff revenue the government collects cancel out the deadweight loss the tariff creates?
- Going furtherWhat happens to the size of a tariff's deadweight loss as the tariff rate gets larger?
Your turn1 of 2
Find the change in government revenue from a 62 dollar per ton tariff that cuts steel imports from 45 tons to 31 tons.Import Quotas
- How it worksHow does an import quota restrict quantity directly instead of raising price the way a tariff does, while still causing a similar welfare loss?
- Common mistakeWhy isn't the main difference between a tariff and a quota just a matter of paperwork?
- Ties togetherHow does the deadweight loss from a quota compare to the deadweight loss from a tariff that lets in the same quantity of imports?
Your turn1 of 2
An import quota has the same effect on domestic price as a tariff of 75 dollars per ton would. If the world price is 539 dollars, what is the resulting domestic price under the quota?The Arguments for Protectionism and Why Most Economists Reject Them
- How it worksHow does the jobs-protection argument for tariffs ignore the jobs lost in industries that use the protected good as an input?
- Common mistakeWhy doesn't trading with a poorer country that pays lower wages have to hurt the richer country?
- Going furtherWhat happens to the national-security and infant-industry arguments for protection once you weigh their costs against their benefits?
Your turn1 of 2
A politician argues that a steel tariff saves jobs and is therefore good for the economy as a whole. What does this argument leave out?