CFA Level I · CFA Level I Exam · International Trade
A country is a large importer of a good and imposes a tariff that lowers the world price of that good. The country's net national welfare effect is most likely to be:
Net national welfare is positive if the terms-of-trade gain exceeds the deadweight loss. A large importing country can lower the world price through a tariff, shifting part of the burden to foreign exporters, but the gain is not assured and world welfare still falls.
- Anegative in all cases, because the deadweight loss always exceeds any other gain
- Bpositive if the terms-of-trade gain exceeds the deadweight loss from the tariffCorrect
- Czero, because producer gains exactly offset consumer losses
Explanation
A large country can push down the world price, improving its terms of trade, which is a gain captured in tariff revenue paid by foreign exporters. If this gain exceeds the deadweight losses from distorted production and consumption, national welfare rises. This is not guaranteed, and producer gains do not exactly offset consumer losses.
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