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    volume and terms of trade

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    Suppose that, from an initial equilibrium position in the offer curve diagram, country I imposes a tariff on country II's export good at the same time that consumers in country II change their tastes toward wanting more of II's export good. Illustrate and explain the impact of these two simultaneous events on country I's volume and terms of trade. (Assume that both countries' offer curves are "elastic" throughout.)

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    First, a tariff is "a tax that is imposed by the importing country when an imported good crosses its international boundary" (Parkin, 2008, p. 483). In other words, the tariff increases the price that the consumers of the imported goods in the importing country pay for the good.

    Second, the increase in the demand in ...

    Solution Summary

    The effects on a nation's volume and terms of trade are illustrated.