Problem
Tariffs and subsidies. Adjustment to the changing terms of trade. Speci?city of factors in the short run.
There are only two goods in the world: automobiles and wheat. The production of these goods requires only capital and labor. Imagine an economy which imports automobiles and exports wheat.
If the government raises a tariiT on the import of automobiles it will raise the domestic price of autos. Suppose the price of wheat remains constant.
Be sure to state any additional assumptions you made to answer the questions!
1. Who in the economy will gain and who will lose because of the tariff?
2. Does your answer to (1) depend on whether you thinking about short-run or long-run? How?
3. Does your answer depend on whether the country is large or small? How?