A tariff can increase the welfare of a "large" levying country if the favorable terms-of-trade effect more than offsets the unfavorable protective effect and consumption effect.

Question

Quizplus · Accepted Answer

This statement is true. The favorable terms-of-trade effect occurs when the tariff increases the price of imported goods, making domestically produced goods relatively cheaper. This leads to an increase in exports and a decrease in imports, which can improve the country's terms of trade. However, tariffs can also have unfavorable effects on the domestic economy, such as reducing consumption and increasing prices for consumers. If the favorable terms-of-trade effect is greater than the unfavorable effects, the country may experience overall welfare gains.

A Tariff Can Increase the Welfare of a "Large" Levying