In a scenario where two countries, A and B, specialize in the production of different goods due to economic interdependence, how might the imposition of tariffs by Country A affect the overall efficiency and opportunity cost for both countries?

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Seekh · Accepted Answer

When Country A adds tariffs on the good it imports from Country B, the price of that import rises, so A buys less of it and must produce more of its own goods to meet demand. This forces A to divert resources from its specialized production—its opportunity cost rises because it could have produced the imported good more cheaply elsewhere. Country B, meanwhile, loses export revenue and may have to lower production of its specialty, so its opportunity cost of producing its own good also increases. The overall trade efficiency drops because the two nations no longer allocate resources to the goods they can produce best. For example, if A normally imports textiles from B at $10 each, a 20 % tariff raises the price to $12, making A produce textiles itself, wasting labor that could have made cars more efficiently.

In a scenario where two countries, A and B, specialize in the production of different goods due to economic interdependence, how might the imposition of tariffs by Country A affect the overall efficiency and opportunity cost for both countries?

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