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The following graph shows the domestic market for steel in the United States, where Sp is the domestic supply curve, and Dp is the domestic demand curve. Assume the United States is considered a large nation, meaning that changes in the quantity of its imports due to a tariff influence the world price of steel. Under free trade, the United States faced a total supply schedule of Sp.w, which shows the quantity of steel that both domestic and foreign producers together offer domestic consumers. In this case, the free-trade equilibrium (black plus) occurs at a price of $280 per ton of steel and a quantity of 8 million tons. At this price, the United States imports 6 million tons of steel. Suppose the U.S. government imposes a $100-per-ton tariff on steel imports. On the following graph, use the tan line (rectangle symbol) to draw the new total supply schedule including the tariff (Sp w T). Then use the grey point (star symbol) to indicate the new market equilibrium price and quantity as a result of the tariff. PRICE (Dollars perton) 560 520 480 440 400 360 + 220 + 280 240 200 100 0 Do SD+W 1 Sp 2 3 4 5 07 80 10 QUANTITY OF STEEL (Millions of tons) 101 So+w+T Equilibrium Under Tariff Domestic Revenue Effect Terms-of-Trade Effect Deadweight Loss (?)

The following graph shows the domestic market for steel in the United States, where Sp is the domestic supply curve, and Dp is the domestic demand curve. Assume the United States is considered a large nation, meaning that changes in the quantity of its imports due to a tariff influence the world price of steel. Under free trade, the United States faced a total supply schedule of Sp.w, which shows the quantity of steel that both domestic and foreign producers together offer domestic consumers. In this case, the free-trade equilibrium (black plus) occurs at a price of $280 per ton of steel and a quantity of 8 million tons. At this price, the United States imports 6 million tons of steel. Suppose the U.S. government imposes a $100-per-ton tariff on steel imports. On the following graph, use the tan line (rectangle symbol) to draw the new total supply schedule including the tariff (Sp w T). Then use the grey point (star symbol) to indicate the new market equilibrium price and quantity as a result of the tariff. PRICE (Dollars perton) 560 520 480 440 400 360 + 220 + 280 240 200 100 0 Do SD+W 1 Sp 2 3 4 5 07 80 10 QUANTITY OF STEEL (Millions of tons) 101 So+w+T Equilibrium Under Tariff Domestic Revenue Effect Terms-of-Trade Effect Deadweight Loss (?)

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Publisher:N. Gregory Mankiw
Chapter9: Application: International Trade
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7. Effects of a tariff in a large nation The following graph shows the domestic market for steel in the United States, where Sp is the domestic supply curve, and Dp is the domestic demand curve. Assume the United States is considered a large nation, meaning that changes in the quantity of its imports due to a tariff influence the world price of steel. Under free trade, the United States faced a total supply schedule of Sp+w, which shows the quantity of steel that both domestic and foreign producers together offer domestic consumers. In this case, the free-trade equilibrium (black plus) occurs at a price of $280 per ton of steel and a quantity of 8 million tons. At this price, the United States imports 6 million tons of steel. Suppose the U.S. government imposes a $100-per-ton tariff on steel imports. On the following graph, use the tan line (rectangle symbol) to draw the new total supply schedule including the tariff (Sp w T). Then use the grey point (star symbol) to indicate the new market equilibrium price and quantity as a result of the tariff. PRICE (Dollars perton) 560 520 480 440 400 360 220 280 240 200 160 0 6° So+w 1 I 2 3 4 5 6 7 8 QUANTITY OF STEEL (Millions of tons) 9 Sp 10 Sp+w+T Equilibrium Under Tariff Domestic Revenue Effect Terms-of-Trade Effect Deadweight Loss
Transcribed Image Text:7. Effects of a tariff in a large nation The following graph shows the domestic market for steel in the United States, where Sp is the domestic supply curve, and Dp is the domestic demand curve. Assume the United States is considered a large nation, meaning that changes in the quantity of its imports due to a tariff influence the world price of steel. Under free trade, the United States faced a total supply schedule of Sp+w, which shows the quantity of steel that both domestic and foreign producers together offer domestic consumers. In this case, the free-trade equilibrium (black plus) occurs at a price of $280 per ton of steel and a quantity of 8 million tons. At this price, the United States imports 6 million tons of steel. Suppose the U.S. government imposes a $100-per-ton tariff on steel imports. On the following graph, use the tan line (rectangle symbol) to draw the new total supply schedule including the tariff (Sp w T). Then use the grey point (star symbol) to indicate the new market equilibrium price and quantity as a result of the tariff. PRICE (Dollars perton) 560 520 480 440 400 360 220 280 240 200 160 0 6° So+w 1 I 2 3 4 5 6 7 8 QUANTITY OF STEEL (Millions of tons) 9 Sp 10 Sp+w+T Equilibrium Under Tariff Domestic Revenue Effect Terms-of-Trade Effect Deadweight Loss
180 0 D+W 1 2 3 4 5 8 7 8 QUANTITY OF STEEL (Millions of tons) • Domestic revenue effect • Terms-of-trade effect The tarrif's revenue effect (the import tariff multiplied by the quantity of steel imported) can be broken into two components: 9 10 Deadweight Loss On the previous graph, use the green rectangle (triangle symbols) to indicate the domestic revenue effect of the tariff. Then use the purple rectangle (diamond symbols) to indicate the terms-of-trade effect. True Now consider the effect of the tariff on welfare in the United States. On the previous graph, use the black triangles (plus symbols) to indicate the deadweight loss caused by the tariff. False True or False: National welfare in the United States increases as a result of a $100-per-ton tariff on steel imports.
Transcribed Image Text:180 0 D+W 1 2 3 4 5 8 7 8 QUANTITY OF STEEL (Millions of tons) • Domestic revenue effect • Terms-of-trade effect The tarrif's revenue effect (the import tariff multiplied by the quantity of steel imported) can be broken into two components: 9 10 Deadweight Loss On the previous graph, use the green rectangle (triangle symbols) to indicate the domestic revenue effect of the tariff. Then use the purple rectangle (diamond symbols) to indicate the terms-of-trade effect. True Now consider the effect of the tariff on welfare in the United States. On the previous graph, use the black triangles (plus symbols) to indicate the deadweight loss caused by the tariff. False True or False: National welfare in the United States increases as a result of a $100-per-ton tariff on steel imports.
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