Macro and Microeconomics: International Trading - Assignment Example

It must be noted that the importing countries do not always employ the citizens of the country they are in business with. Therefore, when the local industries close down due to external competition, there would be high levels of unemployment. US have faced completion from countries like China and Japan in the automobile industry. This has always seen US increasing its importation from China. For an economy to develop, a country should encourage exportation and reduce importation. This aspect would result into good terms of trade and surplus balance of payment.

It is salient to note that enactment of tariffs would bar importers from importing good into the country and therefore protecting the local industries. The protected industries would therefore expand to create employment for the citizens. Concisely, the economy needs to be independent to give chance to local industries to develop and compete. A country should use its revenue in developing local industries rather developing another country by consuming their products. This will reduce unemployment with a bigger percentage (Carbaugh 2008).

Effects of tariffs on welfare of small and large countries It is the ultimate truth that tariffs have more negative effects on welfare of large countries than on small countries. In a given country, the tariff would affect the welfare of consumers, producers and the government. The welfare of the three groups constitutes the aggregate welfare of an economy or a country. Let us first analyze the effects of tariffs on the larger country. Consumers in an exporting country will suffer a reduction in well being because of the tariffs.

The increase in the domestic price of the imported goods reduces the consumer surplus in the market. In a small country, this reduction will be small since the smaller country imports less goods. The bigger country will experience larger reduction in well being. The producers in the importing countries would experience an increase in well being because of the tariff. (IMF 1998) This is due to increase in the prices of the products that consequently increase the producer surplus. In small country, this surplus would be smaller than large country since the small country will imports fewer goods than larger country.

The importing country would benefit from the tariff since it uses it as revenue. The aggregate welfare effect of the country is the found by summing the gains and losses to consumers. Whenever a large country implements a small tariff, it will raise its national income. On the other hand, a small country still experience national welfare, but the welfare gain will be smaller as compared to that of a bigger country. This is because a smaller country has few consumers and importers due to its small size.

This will result into larger welfare benefit. Since the larger country has many consumers and producers, the total welfare will be higher. (IMF 1998) Implement tariffs on automobiles equal to the difference between US and Mexican wage rates It is true note that automobiles are out sourcing to Mexico due to presence of cheap labor there. It is also true to suggest that for US to counteract this situation, it must impose tariffs on automobile imports that is equivalent to the difference between the US and Mexican wage rates.

This would create a balance between producers in US and the producers in Mexico. It will ensure