Skip to content

IAI Actuarial Core Principles · Business Economics · Globalisation and multinational business

A country imposes a specific tariff of Rs 200 on each imported unit of a good that was previously traded at the world price. Compared with free trade, which outcome is the standard prediction for a small country that is a net importer of the good?

The domestic price rises, domestic output rises and consumption falls. The tariff lifts the domestic price above the world price, so home producers expand while buyers cut back, and imports shrink. The government gains tariff revenue on the imports that remain.

  1. ADomestic price rises, domestic output rises and consumption fallsCorrect
  2. BDomestic price rises, domestic output falls and consumption rises
  3. CDomestic price is unchanged, but government revenue rises
  4. DDomestic price falls, domestic output rises and imports rise
  5. Domestic price rises, and both domestic output and consumption rise

Explanation

A tariff raises the domestic price above the world price for a small country. Higher prices encourage domestic producers to supply more and discourage consumers, so consumption falls and imports fall. The government also collects revenue on the remaining imports. Option 1 reverses the effects on output and consumption.

Did you get it right without looking?

One question tells you little. A timed set on Globalisation and multinational business shows your real accuracy, how long you take and where you lose marks.

Practise Globalisation and multinational businessFree diagnostic mock

More Globalisation and multinational business questions