Overview
This lecture explains the Fordney-McCumber Tariff of 1922, its economic impacts, welfare effects, and its role in US isolationist policy during the 1920s.
The Fordney-McCumber Tariff of 1922
- Passed under President Warren G. Harding to increase tariffs on foreign goods.
- Intended to make the US less reliant on international trade and promote domestic business.
- Reflected a broader 1920s trend toward isolationism following World War I.
Economic Model of Tariffs
- Uses domestic supply and demand curves to show effects of trade and tariffs.
- With free trade, imports increase when the world price is lower than the domestic price.
- A tariff raises the effective price of imports, shifting the world supply curve upwards.
- Higher domestic prices lead to increased domestic production and decreased consumption.
- Imports decrease as a result of the tariff.
Welfare Effects of Tariffs
- Consumer surplus (benefit to buyers) falls due to higher prices and less consumption.
- Producer surplus (benefit to domestic producers) rises as they can charge more and sell more.
- Government gains revenue equal to the tariff rate times the number of imports (area g h in the graph).
- Deadweight loss (areas f and i) arises, representing lost welfare to society with no beneficiary.
- Overall, the loss to consumers outweighs the gains for producers and government, reducing total societal welfare.
Aggregate Supply/Demand and GDP Effects
- Tariffs increase aggregate demand for domestic goods in the short run, causing higher prices (inflation) and higher real GDP.
- GDP formula: GDP = consumption + investment + government spending + exports – imports.
- Tariffs lower imports, and as a result, total consumption often falls due to less access to cheaper foreign goods.
- Domestic production may rise, but overall consumption and welfare decrease because resources shift to less efficient industries.
Key Terms & Definitions
- Tariff — a tax imposed by a government on imported goods.
- Consumer Surplus — the difference between what consumers are willing to pay and what they actually pay.
- Producer Surplus — the difference between what producers are paid and their cost of production.
- Deadweight Loss — the reduction in total welfare resulting from market distortions like taxes or tariffs.
- Isolationism — a national policy of avoiding involvement in international affairs.
- Aggregate Demand/Supply — total demand/supply for goods in an economy.
- Comparative Advantage — the ability of a country to produce a good at lower opportunity cost than others.
Action Items / Next Steps
- Review Appendix 5.3 on international trade and tariff models.
- Read on welfare economics and deadweight loss from tariffs.
- Study the expenditures approach to GDP calculation.