International Trade Theory and Policy
by Steven M. Suranovic

Trade 90

Trade 90

Trade Problem Set 90 2-3

1. Consider the following trade policy actions (each applied by the domestic country) listed along the top row of the following Table. In the empty boxes, use the following notation to indicate the effect of each policy on the variables listed in the first column. Use a partial equilibrium model to determine the answers and assume that the shapes of the supply and demand curves are "normal". Assume that none of the policies begin with, or result in, prohibitive trade policies. Also assume that none of the policies correct for market imperfections or distortions. Use the following notation:

+   the variable increases
-   the variable decreases
0   the variable does not change
A   the variable change is ambiguous  (i.e. it may rise, it may fall)

For example, an export subsidy applied by a large country will cause an increase in the domestic price of the export good, therefore a + is placed in the first box of the table.


Export Subsidy by a Large Country


Export Tax by a Small Country initially in Free Trade

Domestic Market Price



Domestic Industry Employment


Domestic Consumer Welfare


Domestic Producer Welfare


Domestic Government Revenue


Domestic National Welfare


Foreign Price


Foreign Consumer Welfare


Foreign Producer Welfare


Foreign National Welfare



International Trade Theory and Policy - Chapter 90: Last Updated on 1/06/08