Tariffs Quizzes, Questions & Answers

Top Trending Tariffs Quizzes

International Trade Policy: Exploring the Impact of Tariffs and Trade Restrictions Quiz

International Trade Policy: Exploring The Impact Of Tariffs And Trade Restrictions Quiz

Enhance your understanding of international trade policies and the impact of tariffs with this focused quiz. Explore the complexities of trade restrictions and tariffs, assessing your knowledge on their implications in global...

Questions: 5 | Attempts: 10 | Last updated: Aug 4, 2025

Sample Question 1
What are the effects of an import tariff in a small nation?

The Effects of an Import Tariff in a Small Nation A tariff imposed by a small nation will have no effect on prices in world markets. Just as one consumer cannot affect the price of pencils or automobiles by buying more or less, one small nation cannot affect the price of a good it imports from the rest of the world by changing its consumption. For a small nation a tariff will raise the price of imports to domestic consumers by the amount of the tariff. This will shift purchases to domestic sources, driving their price up until it reaches the new higher price of imports. The tariff increases the price of both the imported good and its domestically produced substitute. Although domestic producers will gain from higher prices, there will be net losses for two reasons. First, domestic consumers will be buying some goods from domestic producers that could be supplied from abroad more cheaply. Second, consumers will buy fewer units of the good so the gains consumers previously received on these units will no longer occur. These net losses can be better described graphically. The SXcurve in Figure 5.1 is the supply of good X from domestic producers. The DXcurve in Fig. 5.1 is the demand for good X by domestic consumers. In the absence of trade, the price is $25, which is where quantity supplied equals quantity demanded. If the nation can buy good X at a world price of $15, shown as the flat line in Fig 5.1 at $15 (also labeled Pw), then the consumers of this nation will want to buy 600 units of good X while producers will want to produce 100 units of good X. The domestic excess demand at $15 is fulfilled by imports equal to 500 units. If, now, a tariff of $5 per unit is imposed on imports of good X, then the new price faced by domestic consumers is $20. With the small nation assumption, the world price of $15 is unchanged because the nation is too small to affect world prices. Thus, the world price remains at $15, so that after the tariff of $5 is added, the relevant price of X in the nation is now $20. With an increase in price from $15 to $20, producers increase production by 80 more units, for a total of 180 units supplied domestically. Consumers respond to the $20 price by buying 500 units. Now the amount imported is 320 units. The quantity imported falls as a result of the imposition of the tariff because domestic production has increased and the quantity demanded by domestic consumers has decreased. The government of the above nation will collect revenues from the tariff. With a quantity imported of 320 and a tariff of $5 per unit, the revenues from the tariff are $1600 and equal to area c in Fig. 5.1. Summarizing the effects of the tariff for the above case:

If a small nation imposes a tariff, the price of imported goods to domestic consumers will decrease, leading to increased imports and consumption.

A tariff imposed by a small nation will significantly reduce prices in world markets due to increased competition and lower tariffs.

The effects of an import tariff in a small nation are negligible, as it does not impact domestic producers or consumers in any way.

Sample Question 2
What are the effects of an import tariff in a large nation?

The gains and losses of an import tariff in a large nation include an increase in consumer surplus, an increase in producer surplus, and a decrease in tariff revenues.

The Effects of an Import Tariff in a Large Nation In a small nation, the domestic price of the good increases by the full amount of the import tariff, so the tariff is completely shifted to domestic consumers. For a large country the tariff reduces domestic consumption of the good and, because the country is large, this reduced demand causes world prices to drop. As a result of the tariff, domestic consumers will still pay more, but the price increase to domestic consumers is less than the size of the tariff because the tariff is added to the world price, which has fallen. Part of the tariff has been shifted to foreign sellers of the good because the price falls on the world market. This is shown in Figure 5.2. The tariff is assumed to lower the world price from $15 to $13, so consumers pay $3 of the $5 because consumers now pay $18 rather than $15. Foreign producers pay $2 of the $5 tariff because the world price has fallen from $15 to $13. The gains and losses are now: Loss of consumer surplus = area a+b+c+d Gain in producer surplus = a Gain in tariff revenues = c+e. The gains minus the losses are (a+c+e) – (a+b+c+d) = e – (b+d). If area e exceeds area b+dthen there is a gain to the nation imposing the tariff. If area e is less than area b+d, then there is a loss to the nation imposing the tariff. In the case of a large nation, a tariff can be beneficial, but is not necessarily so. Not all tariffs will increase the welfare of a large nation. In the extreme, suppose a tariff is imposed that prohibits all imports. This is called a prohibitive tariff. A prohibitive tariff cannot be welfare enhancing because no part of the tariff can be shifted to foreigners because there are no imports, so there is no area e. Thus, the tariff must be of the right size to improve the welfare of a large nation. The tariff that maximizes the welfare of a large nation is called the optimum tariff and is somewhere between zero and the prohibitive tariff.

The gains and losses of an import tariff in a large nation include an increase in consumer surplus, a decrease in producer surplus, and a decrease in tariff revenues.

The gains and losses of an import tariff in a large nation include a decrease in consumer surplus, an increase in producer surplus, and a decrease in tariff revenues.

Sample Question 3
What is the concept that measures the degree to which tariffs protect domestic industries from foreign competition by evaluating the increase in domestic value added as a result of the tariff?

Import Substitution Policy

Comparative Advantage Theory

The Effective Rate of Protection Tariffs are generally intended to protect domestic industry from foreign competition but the degree to which they do so is often misestimated. If, for example, autos sell for $20,000 and use $15,000 of imported inputs, then there will be $5,000 of domestic activity that goes to produce the automobile. This is called domestic value added. If there is a tariff of 10% placed on automobiles, then the nominal tariff is 10%, but the rate of effective protection is quite different. Auto prices will increase to $22,000, which now makes domestic valued added equal to $7,000, which is a 40% increase over the original domestic value added. This increase in domestic value added is the rate of effective protection.

Balanced Trade Strategy