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7. Effects of a tariff in a large nation The following graph shows the domestic market for steel in the United States, where Sp is the domestic supply curve, and Dp is the domestic demand curve. Assume the United States is considered a large nation, meaning that changes in the quantity of its imports due to a tariff influence the world price of steel. Under free trade, the United States faced a total supply schedule of Sp+w, which shows the quantity of steel that both domestic and foreign producers together offer domestic consumers. In this case, the free-trade equilibrium (black plus) occurs at a price of $210 per ton of steel and a quantity of 16 million tons. At this price, the United States imports 12 million tons of steel. Suppose the U.S. government imposes a $75-per-ton tariff on steel imports. On the following graph, use the tan line (rectangle symbol) to draw the new total supply schedule including the tariff (SD+w+T). Then use the grey point (star symbol) to indicate the new market equilibrium price and quantity as a result of the tariff. ? 420 T DD

7. Effects of a tariff in a large nation The following graph shows the domestic market for steel in the United States, where Sp is the domestic supply curve, and Dp is the domestic demand curve. Assume the United States is considered a large nation, meaning that changes in the quantity of its imports due to a tariff influence the world price of steel. Under free trade, the United States faced a total supply schedule of Sp+w, which shows the quantity of steel that both domestic and foreign producers together offer domestic consumers. In this case, the free-trade equilibrium (black plus) occurs at a price of $210 per ton of steel and a quantity of 16 million tons. At this price, the United States imports 12 million tons of steel. Suppose the U.S. government imposes a $75-per-ton tariff on steel imports. On the following graph, use the tan line (rectangle symbol) to draw the new total supply schedule including the tariff (SD+w+T). Then use the grey point (star symbol) to indicate the new market equilibrium price and quantity as a result of the tariff. ? 420 T DD

Principles of Macroeconomics (MindTap Course List)
Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN:9781305971509
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter9: Application: International Trade
Section: Chapter Questions
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7. Effects of a tariff in a large nation The following graph shows the domestic market for steel in the United States, where Sp is the domestic supply curve, and Dp is the domestic demand curve. Assume the United States is considered a large nation, meaning that changes in the quantity of its imports due to a tariff influence the world price of steel. Under free trade, the United States faced a total supply schedule of Sp+w, which shows the quantity of steel that both domestic and foreign producers together offer domestic consumers. In this case, the free-trade equilibrium (black plus) occurs at a price of $210 per ton of steel and a quantity of 16 million tons. At this price, the United States imports 12 million tons of steel. Suppose the U.S. government imposes a $75-per-ton tariff on steel imports. On the following graph, use the tan line (rectangle symbol) to draw the new total supply schedule including the tariff (SD+W+T). Then use the grey point (star symbol) to indicate the new market equilibrium price and quantity as a result of the tariff. (?) PRICE (Dollars per ton) 420 390 360 330 300 270 240 210 180 150 120 0 $D+W 2 Do 10 12 14 16 4 6 8 QUANTITY OF STEEL (Millions of tons) . Domestic revenue effect • Terms-of-trade effect O True Sp 18 20 O False SD+W+T Equilibrium Under Tariff Domestic Revenue Effect The tarrif's revenue effect (the import tariff multiplied by the quantity of steel imported) can be broken into two components: Terms-of-Trade Effect Deadweight Loss On the previous graph, use the green rectangle (triangle symbols) to indicate the domestic revenue effect of the tariff. Then use the purple rectangle (diamond symbols) to indicate the terms-of-trade effect. Now consider the effect of the tariff on welfare in the United States. On the previous graph, use the black triangles (plus symbols) to indicate the deadweight loss caused by the tariff. True or False: National welfare in the United States decreases as a result of a $75-per-ton tariff on steel imports.
Transcribed Image Text:7. Effects of a tariff in a large nation The following graph shows the domestic market for steel in the United States, where Sp is the domestic supply curve, and Dp is the domestic demand curve. Assume the United States is considered a large nation, meaning that changes in the quantity of its imports due to a tariff influence the world price of steel. Under free trade, the United States faced a total supply schedule of Sp+w, which shows the quantity of steel that both domestic and foreign producers together offer domestic consumers. In this case, the free-trade equilibrium (black plus) occurs at a price of $210 per ton of steel and a quantity of 16 million tons. At this price, the United States imports 12 million tons of steel. Suppose the U.S. government imposes a $75-per-ton tariff on steel imports. On the following graph, use the tan line (rectangle symbol) to draw the new total supply schedule including the tariff (SD+W+T). Then use the grey point (star symbol) to indicate the new market equilibrium price and quantity as a result of the tariff. (?) PRICE (Dollars per ton) 420 390 360 330 300 270 240 210 180 150 120 0 $D+W 2 Do 10 12 14 16 4 6 8 QUANTITY OF STEEL (Millions of tons) . Domestic revenue effect • Terms-of-trade effect O True Sp 18 20 O False SD+W+T Equilibrium Under Tariff Domestic Revenue Effect The tarrif's revenue effect (the import tariff multiplied by the quantity of steel imported) can be broken into two components: Terms-of-Trade Effect Deadweight Loss On the previous graph, use the green rectangle (triangle symbols) to indicate the domestic revenue effect of the tariff. Then use the purple rectangle (diamond symbols) to indicate the terms-of-trade effect. Now consider the effect of the tariff on welfare in the United States. On the previous graph, use the black triangles (plus symbols) to indicate the deadweight loss caused by the tariff. True or False: National welfare in the United States decreases as a result of a $75-per-ton tariff on steel imports.
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