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International Economics
C. Brunnschweiler
12.1 Introduction
12.2 Tariffs
A SMOPEC can trade as much as it wants at fixed world prices p*; tariffs will not affect p*, but they will affect the equilibrium price ratio facing domestic consumers and producers. Assume that pattern of comparative advantage is such that this country exports Y and imports X. Government places ad valorem tax of t on each unit of X imported into country. Because p* is fixed, domestic price of X will rise by full amount of tax.
International Economics C. Brunnschweiler
where subscripts p and c again denote the amounts of a good produced and consumed, resp. Domestic producers and consumers will equate domestic MRS in consumption and MRT in production to domestic price ratio, which is higher than world price ratio. However, domestic production and consumption will be linked by world price ratio. Post-tariff equilibrium is given in Figure 15.1: A is the autarky equilibrium, whereas Cf and Qf refer to free trade consumption and production points, resp.
International Economics C. Brunnschweiler