ECS4865
ASSIGNMENT 2 2025
UNIQUE NO.
DUE DATE: 25 AUGUST 2025
,ECS4865 Assignment 02
1. What is an import demand curve? Derive Home’s import demand curve.
An import demand curve shows how much of a good a country (Home) wants to import
at different world prices. It’s drawn by looking at the difference between the quantity
Home consumes and the quantity it produces on its own. For example, if Home
consumes 100 units of cars but produces only 40, it must import 60 units. So, the import
demand at that price is 60.
To derive the curve, we use the domestic market data. Start with the demand and
supply curves in Home. When the world price of a good is low, Home will import more
because the good is cheaper than what it costs to produce locally. If the world price
rises, Home produces more and imports less because local producers find it profitable
to make more. This gives us a downward-sloping import demand curve — higher prices
mean fewer imports. The curve starts where demand minus supply is highest and goes
down as world price rises. It shows how responsive Home is to price changes when
buying goods from other countries.
2. Suppose a tariff is levied at home, which is a big country. Show the effects of a
tariff on: (a) quantity of imports, (b) quantity of exports, and (c) traded volume
(with a diagram).
When a large country like Home puts a tariff (tax) on imports, it affects not just the
country itself but also the world market. A tariff makes imported goods more expensive
for Home consumers. As a result, the quantity of imports goes down because people
buy fewer imported goods and more local ones.
Since imports drop, exports also decline. This is because other countries now earn less
foreign exchange from exporting to Home and can’t afford to buy as many of Home’s
, exports. So, the whole traded volume (imports plus exports) between countries
becomes smaller.
[Insert a well-labeled diagram here showing supply and demand, world price, the effect
of tariff raising the price, and shrinking import/export area.]
In the diagram, the original import volume is the difference between Home demand and
supply at the world price. After the tariff, the price rises, local producers supply more,
and consumers demand less, reducing the gap — that’s the new lower import level. As
Home imports less, its exports must fall too since the trading partner earns less. The
total area of trade shrinks, showing reduced global efficiency.
3. For a large country, when does a tariff improve welfare? Explain with a
diagram.
A large country can sometimes improve its overall welfare by placing a small tariff. This
is because the tariff can lower the world price of the good it imports. When a big country
reduces how much it imports due to a tariff, the world demand drops, so exporters in
other countries have to lower their prices to stay competitive. Home then buys imports
at a lower price, even though it pays a tax.
The gains come from the improvement in the terms of trade — Home pays less for
each unit it imports. However, this works only if the loss in consumer surplus (because
of higher prices) and production inefficiency is smaller than the gain from better trade
terms. If the tariff is too high, it reduces trade too much and welfare falls.
[Insert a diagram showing the tariff’s impact — areas for consumer loss, producer gain,
government revenue, and terms of trade gain.]
In the diagram, welfare improves if the triangle losses are smaller than the rectangle of
government revenue plus terms-of-trade gain. So, a carefully set, small tariff can help —
but it’s a delicate balance.
ASSIGNMENT 2 2025
UNIQUE NO.
DUE DATE: 25 AUGUST 2025
,ECS4865 Assignment 02
1. What is an import demand curve? Derive Home’s import demand curve.
An import demand curve shows how much of a good a country (Home) wants to import
at different world prices. It’s drawn by looking at the difference between the quantity
Home consumes and the quantity it produces on its own. For example, if Home
consumes 100 units of cars but produces only 40, it must import 60 units. So, the import
demand at that price is 60.
To derive the curve, we use the domestic market data. Start with the demand and
supply curves in Home. When the world price of a good is low, Home will import more
because the good is cheaper than what it costs to produce locally. If the world price
rises, Home produces more and imports less because local producers find it profitable
to make more. This gives us a downward-sloping import demand curve — higher prices
mean fewer imports. The curve starts where demand minus supply is highest and goes
down as world price rises. It shows how responsive Home is to price changes when
buying goods from other countries.
2. Suppose a tariff is levied at home, which is a big country. Show the effects of a
tariff on: (a) quantity of imports, (b) quantity of exports, and (c) traded volume
(with a diagram).
When a large country like Home puts a tariff (tax) on imports, it affects not just the
country itself but also the world market. A tariff makes imported goods more expensive
for Home consumers. As a result, the quantity of imports goes down because people
buy fewer imported goods and more local ones.
Since imports drop, exports also decline. This is because other countries now earn less
foreign exchange from exporting to Home and can’t afford to buy as many of Home’s
, exports. So, the whole traded volume (imports plus exports) between countries
becomes smaller.
[Insert a well-labeled diagram here showing supply and demand, world price, the effect
of tariff raising the price, and shrinking import/export area.]
In the diagram, the original import volume is the difference between Home demand and
supply at the world price. After the tariff, the price rises, local producers supply more,
and consumers demand less, reducing the gap — that’s the new lower import level. As
Home imports less, its exports must fall too since the trading partner earns less. The
total area of trade shrinks, showing reduced global efficiency.
3. For a large country, when does a tariff improve welfare? Explain with a
diagram.
A large country can sometimes improve its overall welfare by placing a small tariff. This
is because the tariff can lower the world price of the good it imports. When a big country
reduces how much it imports due to a tariff, the world demand drops, so exporters in
other countries have to lower their prices to stay competitive. Home then buys imports
at a lower price, even though it pays a tax.
The gains come from the improvement in the terms of trade — Home pays less for
each unit it imports. However, this works only if the loss in consumer surplus (because
of higher prices) and production inefficiency is smaller than the gain from better trade
terms. If the tariff is too high, it reduces trade too much and welfare falls.
[Insert a diagram showing the tariff’s impact — areas for consumer loss, producer gain,
government revenue, and terms of trade gain.]
In the diagram, welfare improves if the triangle losses are smaller than the rectangle of
government revenue plus terms-of-trade gain. So, a carefully set, small tariff can help —
but it’s a delicate balance.
