ECS4865
ASSIGNMENT 2 2025
UNIQUE NO.
DUE DATE: 25 AUGUST 2025
,ECS4865 Assignment 02
Question 1: Import Demand Curve and Derivation
An import demand curve illustrates the quantity of a good a country wishes to import
at various international prices. It is derived by calculating the gap between the domestic
quantity demanded and the quantity supplied at each price level. If local consumption
exceeds local production, the difference is met through imports. For example, if Home
consumes 100 units but produces 40, it must import 60 units. As world prices fall,
imports increase because foreign goods become cheaper than local alternatives.
Conversely, when prices rise, imports decrease as domestic producers become more
competitive. This results in a downward-sloping curve that reflects the country’s
sensitivity to price changes in international markets.
Question 2: Tariff Effects in a Large Country
When a large country like Home imposes a tariff on imports, the domestic price of
imported goods rises. This leads to a reduction in the quantity of imports as
consumers shift towards locally made products. The fall in imports also impacts
exports: since foreign countries earn less from trade with Home, they reduce their
purchases of Home's goods, lowering export levels. Consequently, the overall volume
of trade declines, as both imports and exports shrink. A diagram would typically show
these effects by highlighting changes in domestic price, reduced import quantity, and
the contraction in trade flow.
, 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
Question 1: Import Demand Curve and Derivation
An import demand curve illustrates the quantity of a good a country wishes to import
at various international prices. It is derived by calculating the gap between the domestic
quantity demanded and the quantity supplied at each price level. If local consumption
exceeds local production, the difference is met through imports. For example, if Home
consumes 100 units but produces 40, it must import 60 units. As world prices fall,
imports increase because foreign goods become cheaper than local alternatives.
Conversely, when prices rise, imports decrease as domestic producers become more
competitive. This results in a downward-sloping curve that reflects the country’s
sensitivity to price changes in international markets.
Question 2: Tariff Effects in a Large Country
When a large country like Home imposes a tariff on imports, the domestic price of
imported goods rises. This leads to a reduction in the quantity of imports as
consumers shift towards locally made products. The fall in imports also impacts
exports: since foreign countries earn less from trade with Home, they reduce their
purchases of Home's goods, lowering export levels. Consequently, the overall volume
of trade declines, as both imports and exports shrink. A diagram would typically show
these effects by highlighting changes in domestic price, reduced import quantity, and
the contraction in trade flow.
, 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.
