Imports identity
Imports = domestic consumption - domestic production
The first line of every tariff problem, applied twice: once at the free trade price and once at the tariff-inclusive price. Every one of the four effects is a difference between those two rows.
- Consumption
- Quantity demanded at the prevailing domestic price
- Production
- Quantity supplied domestically at that same price
Domestic price under an ad valorem tariff
New domestic price = world price x (1 + t)
For a small nation only. Because the foreign supply curve is infinitely elastic, the full duty lands on the domestic price. A large nation would depress the world price instead, so the rise would be less than the duty.
- t
- Ad valorem tariff rate as a decimal, so 100 per cent is 1.00
- World price
- Price at which the rest of the world will supply any quantity
The four effects of a tariff
Consumption effect = consumption after - consumption before
Production effect = production after - production before
Trade effect = imports after - imports before
Revenue effect = imports after x tariff per unit
Name all four, in this order, in any tariff answer. Check yourself: the trade effect equals the consumption effect plus the production effect in size.
- Tariff per unit
- New domestic price minus the world price
- Imports after
- Imports at the tariff-inclusive price, never the free trade figure
Compound duty
Duty = (ad valorem rate x value) + specific sum per unit
Whenever a question gives both a percentage and a fixed sum. Convert the total back into a percentage of value if the question asks which type protects more at a given price.
- Ad valorem rate
- Percentage of value, as a decimal
- Value
- Declared value of the imported unit
- Specific sum
- Fixed money amount per physical unit
Prohibitive tariff
Prohibitive t = (autarky price / world price) - 1
When a question asks what tariff makes the nation self-sufficient. Find the price at which domestic demand equals domestic supply, which is the no-trade point E, then express the required price rise as a percentage of the world price.
- Autarky price
- Price where domestic demand equals domestic supply, so imports are zero
- World price
- The free trade price