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Drag and Drop Activity Answers
- In figure 2 the world price for hockey sticks is
OP1. The government now imposes a tariff equal
to P1P2 causing the price of hockey
sticks to rise to OP2
- At the higher price(OP2) domestic producers
increase the amount they supply to the market from
OQ1 to OQ2. Increasing production
also stimulates domestic employment. This is referred to as
the protection effect as resources are moved from more efficient
areas of the economy into the industries protected by
tariffs.
- The consumption effect is the reduction in consumer demand
from OQ4 to OQ3 as prices increase
from OP1 to OP2
Tariffs can cause inflationary pressure in the economy as consumers receive fewer goods and pay higher prices. Secondly, the protected goods may be used as inputs for another industries increasing their production costs. - The impact of the protection and consumption effects
creates the trade effect causing imports to contract from
Q1Q4 to Q2Q3.
Remember the importers still only receive a price of
OP1 and foreign exchange earnings for exporting
countries have decreased from Q1EFQ to
Q2CDQ4. This could create problems
for our exporting industries as these countries experience
reduced revenue that was used to buy imports.
- In response to the tariff on imports other countries
may impose tariffs on goods that are exported to them. A
retaliation effect could be experienced resulting in job losses
in exporting industries.
- The amount of revenue raised by the government is equal to the area ABCD this is referred to as the revenue effect or redistribution effect. The payment of the tariff by consumers on the imported goods redistributes income from the households to the government. There has also been a redistribution of income from the importers to the domestic producers as they now receive a greater market share.
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