Economics Worksheet With Answers - 2011 (Page 4 of 6) in pdf

Economics Worksheet With Answers - 2011 Page 4

4. The demand and supply for Gloves is given in the following table:

Price

$10

Quantity Supplied

Quantity Demanded

a. The United States can also import gloves from China at $4 per pair and from Mexico at $5

per pair. Currently, the United States imposes a specific tariff of $2 on its glove imports.

Suppose that the United States and Mexico form a free-trade area. How much trade in gloves

is created?

With the tariff, at $6, the US imports 4 pairs of gloves from China and without the tariff, at

$5, the US imports 6 pairs of gloves from Mexico. There are two additional pairs of gloves,

so the tariff reduction creates trade of 2 pairs of gloves.

b. The United States can also import gloves from China at $4 per pair and from Mexico at $5

per pair. Currently, the United States imposes a specific tariff of $2 on its glove imports.

How much trade in gloves is diverted in the U.S.-Mexican free-trade area?

At $6, the US could import 4 pairs of gloves from China, but in the free-trade area this trade

is diverted to Mexico because they are available from Mexico for $5. Therefore, there are

four pairs of gloves that are diverted.

c. The United States can also import gloves from China at $4 per pair and from Mexico at $5

per pair. Currently, the United States imposes a specific tariff of $2 on its glove imports. Is

the United States better off or worse off in its trade in gloves following the free-trade

agreement with Mexico?

The United States is worse off because trade diversion losses exceed trade creation gains.

d. The United States can also import gloves from China at $4 per pair and from Mexico at $5

per pair. Currently, the United States imposes a specific tariff of $2 on its glove imports.

Suppose instead that the United States negotiated a free-trade agreement with China. Will the

United States be better off or worse off as a result of its trade in gloves in the free-trade area

with China?

The United States is better off because there are no trade diversion losses.

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Economics Worksheet With Answers - 2011 Page 4