Let us first discuss the impact of tariff on production and consumption. The above diagram 1 demonstrates that any tariff tends to raise the domestic price of a commodity above its free trade level and thereby stimulates domestic production and reduces domestic consumption of the commodity in question. This is shown more clearly again in partial equilibrium analysis in the [...]
The second point that needs emphasis here is that aside from retaliation, the shape of the foreign country's offer curve will largely determine the degree to which a country will improve its terms of trade by imposing a tariff. In the following figure 5, there are a number of foreign offer curves of different elasticities OF1, OF2, OF 3 and [...]
In the absence of retaliation, a country should be able to levy a tariff on imports which yields some optimal terms of trade and hence an optimal level of community welfare. Beginning at the free trade position (or any tariff- distorted trade position) as a country raises its tariff unilaterally, the terms of trade improve and the volume of trade [...]