Consider a country that is trading with the world. Economists declare the country to be a small country.
a) From an economic point of view what is the difference between a small and a large country in international economics?
b) Draw a home market diagram with an arbitrary supply and demand curve. Based on this diagram derive the import demand function in a second graph!
c) Assume the world market price pw for the considered good is below the equilibrium home market price ph. Illustrate in your two graphs how much the country will import or export!
[Remember: the considered economy represents a small country!]
d) The government of this country introduces a tariff to protect its economy. Illustrate the welfare effects of this trade policy based on your two graphs! Does the welfare increase or decrease?
