How Do Tariffs Maintain A Favorable Balance Of Trade And A Balance Of Payments?


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Tariffs are the duties imposed by the government on the import of goods. Assuming that we are not living in a totally free market economy, the governments will try to protect the local industries by imposing tariffs on imported goods. This will make the imported goods more expensive than the local goods. A favorable balance of trade exists when the company exports more goods then it imports or buys. When there is a tariff on imported goods then the local merchants will not have an incentive to import as importing will cost them more then if they produced locally. In this way the total imports will decline and the balance of trade will become positive.

A balance of payments is favorable when the company has more receipts then it has paid. Assuming the exchange rate to remain fixed, when the imports are less then the country will have lower outflows of money then inflows and the balance will become positive.

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