Consider a large country applying a tariff t to imports of a good like that represented below:

How does the size of the terms-of-trade gain compare with the size of the deadweight loss whenthe tariff is very small and whenthe tariff is very large? Use graphs to illustrate your answer.

(a) Home Market (b) World Market Price Price b+d No-trade equilibrium It Feerstra/Taylor, Inemotional Trade, Se D 2021 Worth Publishers M D2 D, Quantity M2 Imports FIGURE 8-7 Tariff for a Large Country The tariff shifts up the export supply curve from X* to X* + t. As a result, the Home price increases from pW to P* + t, and the Foreign price falls from pW to P* . The deadweight loss in Home is the area of the triangle (b + d), and Home also has a terms-of-trade gain of area e. Foreign loses the area (e + f), so the net loss in world welfare is the triangle (b + d + f)