INTERNATIONAL TRADE - ECON 4431W

Textbook: INTERNATIONAL ECONOMICS by Appleyard and Field (9th edition; McGraw Hill)

1.Explain with diagrams

Given: Under free trade; a small country imports computers. The price of a computer is $700.00.

a. Suppose the country levies a tariff of $100.00 per computer. Show the effects of this change in a diagram. Give all welfare effects. Is the country better off or worse off under restricted trade?

b. Is it better for the country to use an import tariff or an import quota, if the idea is to protect the domestic computer industry? Explain clearly with (no need to give numerical answers in part b.)

c. What are the effects if the government decides to give a subsidy to the domestic computer industry? Do you think this policy may be better or worse than the tariff and quota in order to protect the domestic computer industry? If yes, give reasons. If no, give reasons as well.