EC120 Lecture Notes - Lecture 6: North American Free Trade Agreement, Shortage, Deadweight Loss

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8 Dec 2015

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Country has comparative advantage if it produces good at lower opportunity cost than others. Countries gain from trade if each exports the goods in which it has comparative advantage. Pw = the world price of a good, the price that prevails in world markets. If pd < pw if pw < pd. Country has comparative advantage in good country doesn"t have. Under free trade, the country exports the good under free trade, country comparative advantage imports the good. A small economy is a price taker in world markets its actions have no effect on pw. Not always true, but simplifies the analysis. When an economy engages in free trade, pw is the only relevant price. No seller accepts less than pw, no buyer would pay more than pw. Cs = a +b cs = a. At pe, d = s. but at pw, s > d, so they export the surplus.

Related Questions

Suppose the market for oranges in a small country is closed to international trade. The domestic price is $3 per lb, at which 10,000 lbs are bought and sold in the country, while the world price is $4 per lb. If the country opens up to free trade with the world, the domestic quantity demanded at the world price will be 8,000 lbs, and the domestic quantity supplied at the world price will be 12,000 lbs.

A. Which of the following statements is true?

a. The country will become an importer of oranges because it has a comparative advantage in the production of oranges

b. The country will become an exporter of oranges because it has a comparative advantage in the production of oranges

c. The country will become an importer of oranges because the world has a comparative advantage in the production of oranges

d. The country will become an exporter of oranges because the world has a comparative advantage in the production of oranges

B. At what price (per lb.) will oranges be bought and sold in the country after opening up to trade?

a. $3

b. $4

c. $3.5

C. After opening up to trade, the level of exports/imports for the country will be:

a. 8,000 lbs.

b. 12,000 lbs.

c. 10,000 lbs.

d. 4,000 lbs.

D. How much (in $) is the net gain from trade for this country in opening up to free trade?

coralbadger702

2. Winners and losers from free trade

Consider the market for meekers in the imaginary economy of Meekertown. In the absence of international trade, the domestic price of a meeker is $21. Suppose that the world price for a meeker is $22. Assume that Meekertown is too small to influence the world price for meekers once they enter the international market.

If Meekertown allows free trade, then it will meekers.

Given current economic conditions in Meekertown, complete the following table by indicating whether each of the statements is true or false.

Statement	True	False
Meekertownian consumers are worse off under free trade than they were before.
Meekertownian producers are worse off under free trade than they were before.

True or False: When a country is too small to affect the world price, allowing for free trade will always increase total surplus in that country, regardless of whether it imports or exports as a result of international trade.

True

False

Question 1

In 2003, the ________ ruled that U.S. tariffs on steel imported from the EU were unfair and allowed the EU to issue retaliatory tariffs on U.S. products.

World Trade Organization

United Nations

European Central Bank

International Human Rights Commission

Question 2

The idea of the U.S.-Canadian Free-Trade Agreement that ________ barriers to trade including tariffs and quotas between the United States and Canada by 1998 was to increase the amount that the United States exports to Canada and the amount that the United States imports from Canada.

increased all

removed some

removed all

increased some

Question 3

According to the theory of comparative advantage, a country should specialize and ________ goods with ________ opportunity cost.

import; the lowest

import; negative

export; the lowest

export; the highest

Question 4

A quota is a restriction on imports.

True

False

Question 5

If Holland decreases subsidies to its tulip growers, the price of tulips in the United States will rise.

True

False

Question 6

According to comparative advantage, trade between two countries allows ________ of the trading countries to use its resources most efficiently.

only the smaller

only the larger

neither

each

Question 7

________ U.S. president(s) who has/have held office since GATT was signed has argued for free-trade policies, yet each one has used his powers to protect various sectors of the economy.

Only one

No

Every

Only 3

Question 8

In 1991, the European Union began the process of forming the

		largest free-trade zone in the world.
		only continental military force in the world.
		first international trade agreement in the world.
		first unified currency in the world.

Question 9
1. The Smoot-Hawley tariff set off an international trade war in the
  
  1930s.
  
  1950s.
  
  1970s.
  
  1990s.
  
  Please help me with these questions Thank you.

magentadeer293

EC120 Lecture Notes - Lecture 6: North American Free Trade Agreement, Shortage, Deadweight Loss

EC120 Full Course Notes

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