Chapter 6 – Tariffs
In the process of raising a country’s
consumption, production, prosperity,
wealth, and standard of living, there is (are): a) redistribution of production and b) changes in
factor prices (wages, rents).
Therefore, there will some groups that will be worse off
temporarily, and will therefore oppose free trade, and will lobby for
influence the quantity and composition of imports (mostly) with:
taxes on imports.
restrictions on imports (mostly), e.g. foreign sugar, peanuts.
payments to domestic producers to encourage X, discourage M, e.g. sugar.
: Health and safety standards, human rights, embargoes (Cuba), other issues
- drugs (Colombia).
CH 6: Theoretical analysis of tariffs
CH 7: Nontariffs barriers and arguments for protection
GAINS FROM FREE TRADE
Static gains from trade
, see Figure 6.1 on p. 149.
Free-trade int’l. price is ρ
and free trade
results in production moving from A to _____ and consumption moving from A to _____ .
higher-valued, larger bundle of free-trade goods at _____ could never have been purchased in
There are two gains to trade:
Suppose free-trade at ρ
in production (A).
would increase to Point B because of the opportunity to trade at world prices, a welfare
improvement in consumption vs. autarky.
: As production shifts to Point X, there are further gains as resources are
reallocated to the country’s comparative advantage industry (S), and consumption increases to
Point C, another welfare improvement.
= Consumption Gain (static, short run)
= Production Gain (static, short run)
Economic growth over time (long run) from trade, the PPF shift outward, for
1. Imports of capital goods (machinery, equipment, etc.) that increase the capital stock of the
country (vs. autarky) can lead to improvements in productivity over time.