If a large country imposes a tariff:
A) the terms-of-trade effect may offset deadweight losses on its economy.
B) the terms-of-trade effect can never offset deadweight losses on its economy.
C) there will be no terms-of-trade effect.
D) the country will always be worse off.

Question

Quizplus · Accepted Answer

When a country imposes a tariff, it reduces imports and increases domestic production, leading to a shift in terms of trade in favor of the tariff-imposing country. This can potentially offset some of the deadweight losses caused by the tariff. However, the extent to which the terms-of-trade effect can offset deadweight losses depends on several factors, such as the elasticity of demand for imports and exports and the extent of market power held by the countries involved. Therefore, while the terms-of-trade effect may help to mitigate some of the negative effects of the tariff, it may not fully offset them.

If a Large Country Imposes a Tariff