Consider a small open economy that produces two goods, X and Y. Assume that X is labour intensive, and Y is capital intensive. Draw the general equilibrium trade diagram for this SOE assuming that it has comparative advantage in the production of X. Suppose this country chooses to impose an import tariff.

a)Show the effects of this policy on the welfare of the economy in question.

b)What are the welfare implications of the policy on labour versus on capital?

c)What are the effects of this policy on the volume of trade? (show this)

d)Repeat the above analysis using an excess demand representation.

e.) Prove that the import tariff in the above case is exactly equivalent to a consumption tax on Y plus a production subsidy on Y.