Does england benefit from instituting this tariff

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Reference no: EM131181942

Continuing the Ricardian story from Section 2.1 of this chapter, suppose that England were, after a while, to put a tariff on imports of Portuguese wine. Since we only have wine and cloth in this story, we will have to (somewhat unrealistically) express this tax in terms of units of goods rather than units of currency. Say that England demands that Portugal "pay a tariff of 40 units of cloth" if it wants to sell 100 units of wine. Or, in other words, England now says that it will give Portugal only 60 units of cloth instead of 100, in exchange for 100 units of wine.

a. With production unchanged, what would exchange and consumption be like under these modified terms of trade? (Create a table like Table 7.1.)

b. Does England benefit from instituting this tariff?

c. Would Portugal voluntarily agree to continue trading, with these changed terms of trade? (Assume that Portugal has no power to change the terms of trade-it can only accept England's deal or go back to consuming within its own PPF.)

Reference no: EM131181942

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