Question

r' Question #2 a. Suppose that a candidate running for president of the United states proposed a 20 percent tarifen tax) on imports to the United States from major trading partners like Chine, Japan, Canada, Mexico graphically the impact of this balance or net exports. Assume that the country starts from a position of balanced trade, i.e. exports equal imports. Be sure to label: i. the axes; ii. the curves; ii the initial equilibrium values; iv, the direction the curves shift, and v. the new long-run equilibrium values and the European Union. Use the long-run model of a small open economy to illustrate proposed trade policy on the U.S. exchange rate and the trade b. Based on your graphical analysis, explain the predicted impact of candidate's proposed policy. Specifically state what happens to the exchange rate, the net exports, the volume of imports, and the volume of exports. Page 2

Answer 1

Tariff is tax imposed on imports.

Following diagram illustrates how imposing tariff on imported goods impacts the demand-supply of goods(produced within the country and imported from outside).

Q4-Q1 was the import earlier before tariff.

Domestic production was Q1 and domestic demand was Q4.

After tariff, the the imports will go down to Q3-Q2 and Domestic production will be Q2. This increase in domestic production is due to prices going up from Pw(World price) to Pw+t(World price +Traiff).

Pcs Pd wナ st demand

Impact on balance of trade: USA will have improvement in balance of trade as imports are reducing and it is assumed that exports remain at the same level.

USA currency will appreciate as supply for USA currency will decrease as imports decrease. This will make exports from USA less competitive.

b. Hence net imports volume will reduce, net exports will also reduce as USA currency appreciates and USA goods will become more expensive. Net export will also reduce. It is also expected that China, Mexico, Eurpean Union will also put retaliatory tariff on USA goods.