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    Export Subsidy, Tariff's Effect on Terms of Trade

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    Suppose that one country subsidizes is exports and the other country imposes a countervailing tariff that offsets its effects, so that in the end relative prices in the second country are unchanged. What happens to the terms of trade? What about welfare in the two countries? Suppose, on the other hand, that the second country retaliates with an export subsidy of its own. Contrast the result.

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    Solution Preview

    The terms of trade constitute the quantity of imports that a given quantity of a country's exports can buy. Therefore, if the first country will not be able to import more products into the country since their exporting price to the second ...

    Solution Summary

    This solution is comprised of a detailed explanation to answer what happens to the terms of trade and what about welfare in the two countries.