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Draw a production possibility frontier that is consistent with the above assumptions. Depict an initial world trade equilibrium and the consumption possibilities of the large country, consistent with the above assumptions. Suppose the large country imposes a tariff on its imports. How do the country”s Terms of Trade change? How does the domestic price ratio change? How will the large country”s production pattern change? How will the large country”s consumption and trade pattern change? How is welfare affected? Suppose the large country promotes its exports with a cost subsidy to producers. How do the country”s Terms of Trade change? How does the domestic price ratio change? How will the country”s production pattern change? How will its consumption and trade pattern change? How is welfare affected? Is there a difference to the import tariff?
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