How would tariff help attain favorable balance of trade and balance of payments?

Check the Accounting Dictionary's explanation of tariffs at this site.

http://www.answers.com/topic/tariff

To understand how tariffs can help attain a favorable balance of trade and balance of payments, let's break down the concepts.

A tariff is a tax or duty imposed on imported goods. Its main purpose is to protect domestic industries by making imported goods more expensive, thus encouraging consumers to buy domestically produced goods instead. Tariffs can have several effects on trade and payments:

1. Reducing imports: By making imported goods more costly, tariffs can decrease the demand for foreign products, leading to a decrease in imports. This, in turn, can help reduce the trade deficit, which is the difference between a country's imports and exports.

2. Promoting domestic production: Tariffs can provide a competitive advantage to domestic industries by making imported goods more expensive. This encourages domestic companies to produce more goods locally, leading to an increase in domestic production and employment. This, in turn, can contribute to a favorable balance of trade.

3. Generating government revenue: Tariffs are a source of government revenue. The government collects taxes on imported goods, which can be used to fund various public initiatives. This revenue can help support domestic industries and improve the balance of payments.

4. Protecting domestic industries: Tariffs can act as a protective measure for domestic industries. By making imported goods costlier, it becomes harder for foreign companies to compete with domestic producers. This protection allows domestic industries to grow and become more competitive globally, which can positively impact the balance of trade.

It's important to note that while tariffs can offer short-term benefits, they can also have negative consequences. For example, they may lead to retaliation from trading partners, disrupting international trade relationships and potentially causing a trade war. Thus, the overall impact of tariffs on achieving a favorable balance of trade and balance of payments depends on various factors and should be carefully considered.