Question: Consider a 2 countries (A and B), 2 goods (cars and tech) setup. Suppose that Country A exports cars.
(a) Suppose that Country A imposes a tariff on imports; show graphically what happens to the terms of trade PT PC .
(b) Suppose that Country A imposes a tariff on imports; is Country A necessarily worse off? Explain, using a graph, what the costs and benefits of a tariff for Country A are.
(c) Suppose that Country A imposes a tariff on imports, and Country B retaliates. Illustrate graphically a scenario in which the terms of trade PT PC grow in equilibrium. Is this a favorable movement of the terms of trade for Country B? Why?
( d) Suppose that Country A imposes a tariff on imports, and Country B retaliates. Illustrate graphically a scenario in which the terms of trade PT PC fall in equilibrium. Is this a favorable movement of the terms of trade for Country B? Why?