Principles of Economics- Mankiw (5th) 181

Principles of Economics- Mankiw (5th) 181 - CHAPTER 9 A P P...

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CHAPTER 9 APPLICATION: INTERNATIONAL TRADE 187 steel, a tax on steel imports is irrelevant. The tariff matters only if Isoland becomes a steel importer. Concentrating their attention on this case, the economists com- pare welfare with and without the tariff. Figure 9-6 shows the Isolandian market for steel. Under free trade, the domes- tic price equals the world price. A tariff raises the price of imported steel above the world price by the amount of the tariff. Domestic suppliers of steel, who compete with suppliers of imported steel, can now sell their steel for the world price plus the amount of the tariff. Thus, the price of steel—both imported and domestic— rises by the amount of the tariff and is, therefore, closer to the price that would prevail without trade. The change in price affects the behavior of domestic buyers and sellers. Be- cause the tariff raises the price of steel, it reduces the domestic quantity demanded from Q 1 D to Q 2 D and raises the domestic quantity supplied from
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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