Explore tariff welfare effects, customs union analysis and trade creation vs trade diversion. Switch between three modes to model different trade policy scenarios. Built for AQA, Edexcel and OCR.
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Tariff raises domestic price from £30 to £45. Imports fall from 63.9 to 28.5. DWL = 265.6.
Free trade lets countries specialise in what they produce at the lowest opportunity cost, and trade policy changes who gains and who loses from that trade. This tool models the domestic market for an imported good at the world price and shows the welfare effects of an import tariff, a customs union with a common external tariff, and trade creation and trade diversion.
Label the axes price and quantity, draw domestic demand and supply, a horizontal world price line and a second line at the world price plus the tariff. Mark Qs1, Qd1, Qs2 and Qd2, and shade the government revenue rectangle and the two deadweight loss triangles. Your analysis should name each group affected: consumers lose, domestic producers gain, the government gains revenue and society bears a net welfare loss. If the question is about comparative advantage or the terms of trade, use a numerical example or a PPF instead, because this diagram shows the effects of protection in one market.
Evaluate: The case against tariffs assumes that resources move easily to other industries and that the world price is fixed. Protection may be justified to support infant industries until they can compete, to prevent dumping or to protect strategic industries, although it risks retaliation and raises costs for firms that use imported inputs. A large importing country may also gain if a tariff pushes down the world price, improving its terms of trade. The overall effect depends on the size of the tariff and the price elasticities of domestic demand and supply.
Revise the theory behind this tool in our Edexcel revision notes:
Practise drawing the static versions you will need in the exam:
A country has a comparative advantage in a good if it can produce it at a lower opportunity cost than another country. Even if one country is better at producing everything, both can gain from trade if each specialises in the good where its opportunity cost is lowest and trades for the other, provided the terms of trade lie between their opportunity cost ratios.
A tariff raises the domestic price of the imported good. Consumers pay more and buy less, so consumer surplus falls. Domestic producers can sell more at a higher price, so producer surplus rises. The government gains revenue equal to the tariff multiplied by the remaining imports. The rest of the lost consumer surplus is a deadweight loss to society.
The terms of trade measure the rate at which a country’s exports exchange for its imports. They are calculated as an index: the average price of exports divided by the average price of imports, multiplied by 100. A rise means the terms of trade have improved, because each unit of exports now pays for more imports.