Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

13 
 
 
 
TARIFF AND THEIR EFFECTS 
 
Unit Structure 
 
13.0 Objectives 
13.1 Introduction 
13.2 Effects of Tariffs 
13.3 Free Trade versus protectionism 
13.4 Protection Trade Policy 
13.5 Summary 
13.6 Questions 
 
13.0 OBJECTIVES 
 
To understand the meaning of tariffs 
To study the various effects of tariffs on large and small 
countries 
To study the concept of Free trade, its advantages and 
disadvantages 
To study the concept of Protection policy, its advantages and 
disadvantages
 
13.1 INTRODUCTION OF TARIFFS 
Economics is a broad field; there are many areas that relate 
to economics. One of the most important issues in a country‘s 
economy is trading; therefore, tariffs are most often discussed 
when talking about imported goods. A tariff is simply a tax or duty 
placed on an imported good by a domestic government. Tariffs are 
usually levied as a percentage of the declared value of the good, 
similar to a sales tax. Unlike a sales tax, tariff rates are often 
different for every good, and tariffs do not apply to domestically 
produced goods. Therefore, tariffs do affect the economy and also 
change consumers and producers‘ behavior. Every country in the 
world trades with other countries, depending on how much they 
need and the level of their production. 

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The purpose of the tariff is largely categorized by two big 
concepts. First, an original concept is to defend domestic industries 
from foreign capital that would have comparative or absolute 
advantages to domestic products. If a country has excess imports, 
then the consumers in the foreign country gain from that 
importation. This is due to a lower world price of a product.
However, excess imports create a trade deficit. Trade deficit does 
not create employment in a post-Keynesian world with weak unions 
according to Irwin Secondly, the principle of tariff is that imported 
goods from countries want to gain extra profits from imported 
goods. 
There are three standard situations in which governments 
often impose tariffs. First is to protect fledgling domestic industries 
from foreign competition. Secondly is to protect aging and 
inefficient domestic industries from foreign competition. Finally is to 
protect domestic producers from dumping by foreign companies or 
governments. 
Furthermore, we will see in details the effects of tariffs on economy.