1. a. A small country imports industrial goods and exports agricultural goods. B

Question

1. a. A small country imports industrial goods and exports agricultural goods. Both industry and agricultural are perfectly competitive. A new minimum wage law raises wages in industry but not in agriculture. However, all workers displaced from industry as a result of the new, higher wage find employment in agriculture. Is an import tax on industrial goods the best way to deal with any resulting problems? Why (not) ?

b. Your country imports cigarettes. Identical cigarettes are also produced inside your country in a prefectly competitive industry. The Government wishes to reduce the consumption of cigarettes. Is an import tax on cigarettes the best way to reduce cigarette consumption? Why (not) ?

Explanation / Answer

As the small country exports the agricultural goods thus it means it produces more than what its population is consuming. Now when the displaced workers from industry finds employment in agriculture results in increases burden on small country as it will consume more of agricultural produce leaves less for exports and thus exports earnings will gets reduced

Also when the marginal productivity in agriculture is zero with the increase in work force the earnings of small country will not increase. Thus to overcome from the possible fear of deficit, import tax could be considered as a way to deal with such economic problem.

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