Assume the United States is a large consumer of steel that is able to influence the world price. Its demand and supply schedules are respectively denoted by DU.S. and SU.S. in Figure 4.2. The overall (United States plus world) supply schedule of steel is denoted by SU.S.+W.
Figure 4.2. Import Tariff Levied by a "Large" Country ?
-According to Figure 4.2, the tariff's terms-of-trade effect equals
A) $300.
B) $400.
C) $500.
D) $600.

Question

Assume the United States is a large consumer of steel that is able to influence the world price. Its demand and supply schedules are respectively denoted by DU.S. and SU.S. in Figure 4.2. The overall (United States plus world) supply schedule of steel is denoted by SU.S.+W.
Figure 4.2. Import Tariff Levied by a "Large" Country  ?
-According to Figure 4.2, the tariff's terms-of-trade effect equals
A) $300. 
B) $400. 
C) $500. 
D) $600.

Quizplus · Accepted Answer

The terms-of-trade effect can be calculated by subtracting the post-tariff domestic price from the pre-tariff domestic price and multiplying by the quantity of imports. In this case, the pre-tariff domestic price is $800 and the post-tariff domestic price is $1200. Therefore, the terms-of-trade effect is ($800-$1200) x 1000 = $400, which means that the importing country gains $400 in terms of its terms of trade due to the tariff.

Assume the United States Is a Large Consumer of Steel