Answer to Question #210172 in Economics of Enterprise for Abel

Question

Discuss in detail about the effect of tariff on a large country and developing country.

Answer 1

Along with the small countries, there are a small number of so-called "big countries" in the world. A country is considered large if a change in domestic demand for imports affects the level of the world price.

International trade involves two countries producing and consuming the same product. We will plot prices along the vertical axis, and the volumes of output of the same product for countries A and B on the horizontal axis. At the same time, the increase in production for country A in this figure is shown, as usual, from left to right, and for country B, to the left of scratch. Therefore, the supply and demand curves for country A will have the usual form, but for country B they will be reversed: the SB line will have a negative slope, while the DB line will have a positive slope. This is the peculiarity of this figure, which must be borne in mind during the analysis.

In the absence of international trade, equilibrium in the domestic markets of the two countries develops at different equilibrium prices. The ratio of points E and E ', which characterize the state of equilibrium in the markets of countries A and B, indicates that in country A the level of the equilibrium price for the same product is higher than in country B. The difference in the levels of domestic equilibrium prices predetermines the direction of movement of commodity flows with the beginning of the establishment of trade relations: country A will start importing goods from country B.