Trade Tariff - Detailed Analysis

Summary

The video explains the effects of tariffs on domestic and foreign producers, consumers, and government revenue. It highlights the rise in prices, reduction in domestic demand, and the increase in domestic supply due to tariffs. The analysis details how foreign producers lose revenue while the government gains through tariffs. Additionally, the video examines changes in consumer and producer surplus, with consumers losing out due to higher prices. The concept of deadweight loss, representing inefficiencies and lost consumer benefits, is also explored. The presenter encourages viewers to master the diagram for exam success.

Takeaways

• 😀 The video discusses the impact of tariffs on various economic factors using a dissected tab diagram.
• 📈 The price increases due to the tariff, moving from PW to PW + T, causing domestic demand to contract.
• 📉 Domestic demand decreases from Q2 to Q4, but domestic supply increases from Q1 to Q3 due to higher prices.
• 🛑 Imports decrease as the excess demand shrinks, with foreign producers selling fewer goods to the domestic market.
• 💰 Domestic producer revenue increases significantly from just 'A' to 'A + B + E + F + G', thanks to higher prices and expanded supply.
• 🚫 Foreign producers lose revenue, dropping from 'B + C + D' to just 'C', as some of the increased price goes to the government.
• 🏛 Government revenue increases as a result of tariffs, represented by area 'H' in the diagram.
• 🔻 Consumer surplus decreases from a large triangle to a smaller one due to the price increase.
• 📈 Producer surplus grows with the higher prices, shifting from a smaller green triangle to a much larger one.
• ⚠ Deadweight losses appear in areas 'G' and 'I', representing lost world efficiency and consumer surplus that are never recovered.

Q & A

What is the effect of a tariff on price in the domestic market?

A tariff increases the price in the domestic market, causing it to rise from PW (the original price) to PW plus T (the new price after the tariff).

How does a tariff affect domestic demand?

A tariff causes domestic demand to contract. Initially, demand was at Q2, but with the new higher price, demand decreases to Q4.

What happens to domestic supply when a tariff is imposed?

Domestic supply increases when a tariff is imposed. Initially, supply was at Q1, but it rises to Q3 due to the higher price.

How are imports affected by the imposition of a tariff?

Imports are squeezed due to both a reduction in demand and an increase in domestic supply. Initially, imports covered Q1 to Q2, but after the tariff, they are reduced to cover only Q3 to Q4.

What is the impact of a tariff on domestic producer revenue?

Domestic producer revenue increases with the tariff. Before the tariff, revenue was represented by the area 'A' (PW times Q1), but after the tariff, it becomes 'A plus B plus E plus F plus G' (PW + T times Q3), reflecting a significant increase.

How does a tariff affect foreign producer revenue?

Foreign producer revenue decreases with a tariff. Initially, foreign producers earned B + C + D from selling exports to the domestic market. After the tariff, they only earn C, as the government collects H as revenue from the tariff.

What happens to government revenue with the imposition of a tariff?

The government earns revenue from the tariff, represented by the area 'H'. This revenue can be used for public spending on infrastructure, education, and healthcare.

How is consumer surplus affected by a tariff?

Consumer surplus decreases when a tariff is imposed. Initially, it was represented by a large triangle under the demand curve. After the tariff, this area shrinks, reducing consumer welfare.

What happens to producer surplus after a tariff is imposed?

Producer surplus increases after a tariff is imposed. Initially, it was represented by a smaller triangle, but with the higher price, the area grows, reflecting greater producer benefits.

What are the deadweight losses associated with a tariff?

A tariff results in two areas of deadweight loss: 'G', representing a loss of world efficiency, and 'I', representing a loss of consumer surplus. These losses are not recovered and reflect lost economic benefits.