Country A is a large country while Country B is a small country. Both countries decided to impose tariffs on their imports. What will be the impact of this decision on their producers, suppliers and economy as a whole? Explain with the help of diagrams.

In a scenario where both Country A (a large country) and Country B (a small country) decide to impose tariffs on their imports, the impact on their producers, suppliers, and economies can be analyzed.

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Let’s consider the effects using a basic diagram for each country:

Country A (Large Country):

1. Impact on Producers:

• Country A’s domestic producers may experience positive effects due to reduced competition from foreign imports, leading to increased market share and potentially higher profits.
• The domestic industry’s supply curve may shift upward, indicating a reduction in supply due to the tariff-induced decrease in imports.

1. Impact on Suppliers:

• Domestic suppliers providing inputs to the affected industry may benefit as increased production by the domestic industry requires more inputs.
• The suppliers’ equilibrium price and quantity could increase.

1. Impact on Economy as a Whole:

• While the domestic industry gains, consumers may face higher prices for the imported goods, potentially leading to reduced consumer surplus.
• The overall impact on the economy depends on factors like the elasticity of demand and supply, as well as the efficiency of the domestic industry.

Country B (Small Country):

1. Impact on Producers:

• Country B’s domestic producers might face challenges as they lose market share in the large country due to reduced exports caused by tariffs.
• The domestic industry’s supply curve may shift downward, indicating a decrease in production.

1. Impact on Suppliers:

• Domestic suppliers providing inputs to the affected industry may experience reduced demand, potentially leading to lower prices and quantities.

1. Impact on Economy as a Whole:

• Country B’s economy may suffer overall due to reduced export opportunities, potentially leading to unemployment and lower economic growth.
• The loss of consumer surplus in the large importing country may have a cascading effect on Country B’s economy.

It’s important to note that the actual impact depends on various factors, including the elasticity of demand and supply, the size of the tariff, and the economic conditions in both countries. Additionally, considerations such as retaliation measures and global supply chain effects can further complicate the overall impact.