CA Foundation · Business Economics · International Trade
When a small open economy imposes an import tariff on a good, what is the usual effect on the domestic price and domestic production of that good?
A tariff raises the domestic price of the imported good by the duty amount, which makes local production more profitable, so domestic output rises. Consumers pay more and buy less, and imports decline.
- ADomestic price rises and domestic production risesCorrect
- BDomestic price falls and domestic production rises
- CDomestic price rises and domestic production falls
- DDomestic price falls and domestic production falls
Explanation
The tariff raises the domestic price of imports by the amount of the duty. The higher price lets domestic producers sell more and expand output. Option 2 is wrong because a tariff cannot lower the domestic price; it raises it.
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