MGEA02H3 Chap.11 International Trade, Tariffs and Quotas
International Trade, Tariffs and Quotas
Comparative advantage
A country has a comparative advantage in the good it produces at the lower opportunity cost, even if another country is more productive in both goods.
Specialising according to comparative advantage raises total output, and trade at any price between the two opportunity costs makes both countries better off.
Tariffs and imports
For a small importing country the world price sets the domestic price, and imports fill the gap between domestic demand and supply.
A tariff raises the domestic price, increases domestic output, cuts imports, collects revenue and creates two triangles of efficiency loss.
A prohibitive tariff restores the no-trade outcome and collects no revenue; a quota with the same import volume leaves the revenue rectangle with licence holders.
What the answer keys reward
The keys compute opportunity costs from labour requirements or output tables, assign comparative advantage to the lower cost, and show a trade that leaves both countries with more.
For tariffs they find imports at the tariff-inclusive price, compute revenue on those imports and the two efficiency triangles. They flag that a prohibitive tariff collects nothing and that imports can equal all of demand once domestic firms exit.
How this topic connects to earlier chapters
Trade completes the course by bringing the earlier tools together.
Comparative advantage is the opportunity-cost idea of chapter 1 applied to two countries, the import gap is supply and demand from chapter 2, the welfare areas are the surpluses of chapter 3, and the tariff behaves like the excise tax of chapter 4 with revenue collected at the border.
What this chapter covers
- 01
Absolute and comparative advantage
- 02
Gains from specialisation and trade
- 03
Imports at the world price
- 04
Tariff revenue and efficiency loss
- 05
Prohibitive tariffs and long-run imports
- 06
Quotas compared with tariffs
Worked example · free
Imports and the cost of a tariff
- 2At $20, Qd = 80 and Qs = 20, so imports are 60.
- 2At $26, Qd = 68 and Qs = 32, so imports fall to 36.
- 2Revenue is 6 × 36 = $216.
- 2The two triangles are ½ × 12 × 6 = $36 each, a $72 loss.
Key terms
- Comparative Advantage
- Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer.
- Absolute Advantage
- Absolute advantage is the ability to produce a good using fewer resources than another producer.
- World Price
- The world price is the price at which a good trades internationally, taken as given by a small country.
- Tariff
- A tariff is a tax on imported goods that raises their domestic price.
- Import Quota
- An import quota is a legal limit on the quantity of a good that may be imported.
- Prohibitive Tariff
- A prohibitive tariff is one high enough to eliminate imports, so it collects no revenue.
International Trade, Tariffs and Quotas FAQ
Can a country gain from trade if it is less productive in both goods?
Yes. Gains depend on comparative advantage, which compares opportunity costs. A country that is less productive in everything still has a lower opportunity cost in one good and gains by specialising in it.
Why can a tariff collect no revenue?
Revenue is the tariff times the imports that still arrive. A tariff high enough to raise the domestic price to the no-trade price eliminates imports, so the government collects nothing even though the tariff is large.
How does a quota differ from a tariff with the same imports?
The domestic price and quantities are the same, but the rectangle that would have been tariff revenue goes to whoever holds the import licences rather than to the government.
Why does trade raise world output without new resources?
Each country moves its resources into the good it produces at the lower opportunity cost. Producing each good where it is relatively cheapest means the same labour makes more in total, and the terms of trade divide that extra output between the countries.
Exam move
Work one labour-requirement table to the trade pattern and a mutually beneficial trade, then solve a small-country import market with and without a tariff, checking that all surplus changes add up. Close the term by working one mixed question that uses trade, surplus and a tax wedge together, as the final may.
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