Commercial Policy Define Instruments consumer-producer: A definition of such policy which is designed to affect a countries trade relations with the rest of the world country is known as a commercial policy.
Instruments of Commercial Policy
- Tariff – Definition
- Effect of tariff (partial analysis) price effect, consumption effect, the volume of trade effect balance of payments effect. Consumer surplus affects employment level.
For example, the price of a commodity is unknown by the consumer, and him willing to pay a higher price but that commodity met him/their purchase at a lower price. This difference between willing to pay and actual pay is called consumer surplus.
The difference between a producer willing to receive the price and actually receive is a called producer surplus.
Dead Weight Loss of Tariff
VOM = 10 R = TxM
VOM = 80 = 5×80 = 400
CDFG = Revenue
A = producer surplus
C Gain Revenue
B,D = Dead weight loss.
Effects of Tariff
Small country case
Commercial Policy Define Instruments consumer-producer:
There is no effect on trade / ToT because a small country lacks monopoly and monopsony power.
Monopsony = Purchase at low price
Monopoly = Sale at a high price
Large country case
A large country has monopsony power it can improve its ToT (Terms of Trade).
In case of the tariff, the domestic price will be constant while the volume of import will be increased, in case of Quota domestic price will be Up while M. the adjustment to any shift in demand and supply access in the number of imports in the case of a tariff.
In case of quota an in the domestic price in the case of quota.
Some time import duties on raw material reduced when the final goods are exported. No such rebate occurs in the case of quota.
Tariff does not provide protection with certainty such an outcome I not possible in case of quota.
Domestic producers taking knowledge of demand and supply elasticity for their product.