MPORT TARIFFS: Assume Home and Foreignhave identical preferencesbutHome has relatively more Capital (K) than Foreign but proportionally
Question:
MPORT TARIFFS: Assume Home and Foreignhave identical preferencesbutHome has relatively more Capital (K) than Foreign but proportionally less land (T).Suppose Home is 5 times larger than Foreign.
(2 points) a)Suppose Foreign imposes an import tariff on its imported goods from Home.Explain how this changes world relative prices (Pm/Pa).Hint: first determine which sector is imported.
(3 points) b)Explain why Foreign is unlikely to gain much from its tariff.Relate their net gain to the Terms of Trade and the distortions the tariff induces.
(2 points) c)Suppose instead that Home imposes an import tariff on its imported goods from Foreign.Explain how this changes world relative prices (Pm/Pa).
(3 points) d)Explain why Home is also unlikely to gain much from its tariff.Relate their net gain to the Terms of Trade and the distortions the tariff induces.