Answer to Question #170128 in Microeconomics for Tarun Giri

Question

1. Assume that there are only two countries in the world, USA and India. Both countries produce and consume surfboards. The pre-trade price of surfboards in USA is lower than the pre-trade price of surfboards in India. Very high trade barriers (tariffs) exist between the two countries that prevent any trade from occurring. The two countries are considering signing a free trade agreement that will remove all tariffs and open trade in surfboards between USA and India. a. USA has very low prices for surfboards. Please explain what will happen with prices for surfboards, production of surfboards and consumption of surfboards in USA after the opening to trade. Will USA be an importer or exporter of surfboards? Who in USA will win if a free trade agreement is signed, and who will lose. Explain whether or not USA as a whole will be made better or worse off through the signing of the free trade agreement. You may wish to draw a graph to help illustrate the situation, but it is not required.

Answer 1

a. If USA has very low prices for surfboards, then the prices for surfboards and its production will increase, and consumption of surfboards in USA will decrease after the opening to trade.

USA will be an exporter of surfboards. Producers of surfboards will win if a free trade agreement is signed, and consumers will lose. USA as a whole will be made neither better nor worse off through the signing of the free trade agreement.