Suppose that the small open economy (SOE)cannot produce investment goods, but domestic producers can produce consumption goods. If a tariff t is imposed by the SOE on imports of goods
From the rest of the world, and the rest of the world imposes a tariff t on exports from the SOE to
The rest of the world, then

Question

Quizplus · Accepted Answer

When a tariff is imposed by the small open economy (SOE) on imports, the cost of importing goods from the rest of the world increases. This makes imported goods more expensive relative to domestically produced goods, leading to a decline in imports as consumers and businesses shift towards domestically produced alternatives or reduce overall consumption of those goods. Similarly, when the rest of the world imposes a tariff on exports from the SOE, it makes the SOE's exports more expensive in the global market, potentially reducing demand for those exports. However, the question specifically asks about the effect on imports, which would decline due to the SOE's own tariff on imports.

Suppose That the Small Open Economy (SOE)cannot Produce Investment Goods