Suppose that one country (Country A) subsidizes its exports and the other country (Country B) imposes a "countervailing" tariff that offsets its effect, so that in the end relative prices in the second country are unchanged. What happens to the terms of trade? What about welfare in the two countries? O A. From Country A's perspective, world relative supply will increase and world relative demand will increase. This will improve its terms of trade. The countervailing tariff exacerbates this effect so Country A will definitely gain and Country B definitely loses. O B. From Country A's perspective, world relative supply will decrease and world relative demand will increase. This will improve its terms of trade. The countervailing tariff exacerbates this effect so Country A will definitely gain and Country B definitely loses. O C. From Country A's perspective, world relative supply will decrease and world relative demand will increase. This will worsen its terms of trade. The countervailing tariff exacerbates this effect so Country B will definitely gain and Country A definitely loses. OD. From Country A's perspective, world relative supply will increase and world relative demand will decrease. This will worsen its terms of trade. The countervailing tariff exacerbates this effect so Country B will definitely gain and Country A definitely loses. Suppose, on the other hand, that Country B retaliates with an export subsidy of its own. Contrast the result. O A. Country B's export subsidy would offset the terms of trade effect from Country A's export subsidy, which helps Country A and hurts Country B. O B. Country B's export subsidy would offset the terms of trade effect from Country A's export subsidy, which helps Country B and hurts Country A.
Suppose that one country (Country A) subsidizes its exports and the other country (Country B) imposes a "countervailing" tariff that offsets its effect, so that in the end relative prices in the second country are unchanged. What happens to the terms of trade? What about welfare in the two countries? O A. From Country A's perspective, world relative supply will increase and world relative demand will increase. This will improve its terms of trade. The countervailing tariff exacerbates this effect so Country A will definitely gain and Country B definitely loses. O B. From Country A's perspective, world relative supply will decrease and world relative demand will increase. This will improve its terms of trade. The countervailing tariff exacerbates this effect so Country A will definitely gain and Country B definitely loses. O C. From Country A's perspective, world relative supply will decrease and world relative demand will increase. This will worsen its terms of trade. The countervailing tariff exacerbates this effect so Country B will definitely gain and Country A definitely loses. OD. From Country A's perspective, world relative supply will increase and world relative demand will decrease. This will worsen its terms of trade. The countervailing tariff exacerbates this effect so Country B will definitely gain and Country A definitely loses. Suppose, on the other hand, that Country B retaliates with an export subsidy of its own. Contrast the result. O A. Country B's export subsidy would offset the terms of trade effect from Country A's export subsidy, which helps Country A and hurts Country B. O B. Country B's export subsidy would offset the terms of trade effect from Country A's export subsidy, which helps Country B and hurts Country A.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Suppose that one country (Country A) subsidizes its exports and the other country (Country B) imposes a "countervailing" tariff that offsets its effect, so that in the end relative prices in the second
country are unchanged. What happens to the terms of trade? What about welfare in the two countries?
O A. From Country A's perspective, world relative supply will increase and world relative demand will increase. This will improve its terms of trade. The countervailing tariff exacerbates this effect
so Country A will definitely gain and Country B definitely loses.
O B. From Country A's perspective, world relative supply will decrease and world relative demand will increase. This will improve its terms of trade. The countervailing tariff exacerbates this
effect so Country A will definitely gain and Country B definitely loses.
C. From Country A's perspective, world relative supply will decrease and world relative demand will increase. This will worsen its terms of trade. The countervailing tariff exacerbates this effect
so Country B will definitely gain and Country A definitely loses.
D. From Country A's perspective, world relative supply will increase and world relative demand will decrease. This will worsen its terms of trade. The countervailing tariff exacerbates this effect
so Country B will definitely gain and Country A definitely loses.
Suppose, on the other hand, that Country B retaliates with an export subsidy of its own. Contrast the result.
O A. Country B's export subsidy would offset the terms of trade effect from Country A's export subsidy, which helps Country A and hurts Country B.
B. Country B's export subsidy would offset the terms of trade effect from Country A's export subsidy, which helps Country B and hurts Country A.
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