Suppose country A has a free trade import price of $10, and normally imports this product from country C which is the low cost producer. Suppose further that country A imposes a specific tariff of $10 per unit on imports of this product, which causes the price to be $20. At this price, domestic producers are willing to supply 60 units of the good, and domestic consumers demand a quantity of 80 units. This, of course, means that A imports 20 units from country C.
Graph the following curves by clicking here
Label the vertical axis “P” and the horizontal axis “Q.” Draw and label a demand curve and a supply curve.
Draw a horizontal line representing the free trade price of $10.
Draw a second horizontal line representing the tariff-inclusive price of $20. Mark the quantities supplied and demanded on the horizontal axis as 60 and 80, respectively.
Now suppose that country A enters into a free trade agreement with country B, but not with country C. Now, although the low-cost producer of this good is still country C, country B can sell its products in country A duty-free. As a result, suppose the price of this product falls to $15, while quantity supplied falls to 40 and quantity demanded rises to 120.
Draw a third horizontal line representing the new domestic price of $15. Mark the quantities supplied and demanded on the horizontal axis as 40 and 120, respectively.
Calculate the area that represents the gain in welfare that comes from having a lower price.
Calculate the area that represents the loss in tariff revenue (not captured by A’s consumers).
Is country A better or worse off as a result of the free trade agreement?
Suppose Mongolia has a free trade import price of $15, and normally imports this product from country China, which is the low cost producer. Suppose further that Mongolia imposes a specific tariff of $10 per unit on imports of this product, which causes the price to be $25. At this price, domestic producers are willing to supply 1,000 units of the good, and domestic consumers demand a quantity of 1,500 units. This, of course, means that Mongolia imports 500 units from China.
Graph the following curves by clicking here
Label the vertical axis “P” and the horizontal axis “Q.” Draw and label a demand curve and a supply curve.
Draw a horizontal line representing the free trade price of $15.
Draw a second horizontal line representing the tariff-inclusive price of $25. Mark the quantities supplied and demanded on the horizontal axis as 1,000 and 1,500, respectively.
Now suppose that Mongolia enters into a free trade agreement with country Russia, but not with China. Now, although the low-cost producer of this good is still China, Russia can sell its products in Mongolia duty-free. As a result, suppose the price of this product falls to $22, while quantity supplied falls to 750 and quantity demanded rises to 1,600.
Draw a third horizontal line representing the new domestic price of $22. Mark the quantities supplied and demanded on the horizontal axis as 750 and 1,600, respectively.
Calculate the area that represents the gain in welfare that comes from having a lower price.
Calculate the area that represents the loss in tariff revenue (not captured by Mongolia’s consumers).
Is Mongolia better or worse off as a result of the free trade agreement?
