Short Essay on Economic Significance of Tariffs

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A tariff is a tax on imports. The economic significance of a tariff is that (a) tariff causes the domestic price of the imported goods exceed its foreign price, or, in other words, the price a domestic purchaser pays for an imported good exceeds the amount the foreign exporter receives by the tariff payment; and (b) tariff causes the domestic relative price of imports in terms of exports to exceed the foreign relative price or terms of trade.

All other economic effects of tariff follow from these basic facts about tariffs. These facts are further classified below:

(i) If the tariff is a specific tariff, i.e., a fixed duty imposed on each unit of imported good, then the domestic price of the imported good (Qm) is equal to foreign price (Pm) plus specific tariff (ta)

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(ii) If the tariff is a ad valorem tariff, i.e., the tax levied as a percentage of the price of the imported good, then the domestic price of the imported good (Qm) consists of the price paid to the foreigner (pm) plus the ad valorem tariff rate (ta).

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