1. The U. S. has committed itself to creating a free trade zone between the U.S.
ID: 1108312 • Letter: 1
Question
1. The U. S. has committed itself to creating a free trade zone between the U.S., Canada and Mexico. Why might this be important? Relative to imports and exports to other nations, what is the size of these two North American trading partners trade relationship with the U.S.?
2. What is the law of comparative advantage, and why is it important in international trade?
3. At one time, it was believed that the way for a nation to prosper was to export as much as possible while importing as little as possible. More money would flow into a country than out of a country. Is this really a sound economic strategy? What is the relationship between exports and imports?
4. Suppose that in the absence of trade, the U.S. price for bicycles was higher than the world price for bicycles. Would allowing international trade, mean that the U.S. would import or export bicycles? Who in the U.S. would benefit and who would lose with a free trade policy, and would the gains be greater than the losses?
5. What are the commonly used arguments for the use of tariffs?
Explanation / Answer
1) The U. S. has committed itself to creating a free trade zone between the U.S., Canada and Mexico. This is important because these two nations are involved in most of the imports and exports of the US. So creating a free trade area with these two countries will result in free flow of trade with these countries and increase trade growth between these countries in the form of both hgigher expoirts and imports.
The size of these two North American trading partners trade relationship with the U.S relative to other nations will be huge as as these two countries are in the free trade zone with the US. So there will be no tyrade barriers such as tariffs and import/export duties which becomes hinderance in trade growth.
2) According to the law of comparative advantage a nation will produce that good in which it has less opportunity cost as compared to other country in producing that good.
The law of comparative advantagew is important in international trade because anation cannot specialize in production of all the goods. So a nation will produce only those goods in which it has comparative advantage with respect to other countries. This results in more specialization of trade between countries and make both countries better off with the incraese in gains fom trade in the form of higher production.
3) At one time, it was believed that the way for a nation to prosper was to export as much as possible while importing as little as possible. More money would flow into a country than out of a country. This kind iof economic strategy was followed by those countries which follows import substitution strategy. This strategy was advocated by mercantilists which emphasized on more exports and less imports. But this kind of strategy is not good as imports are also important for economic growth of a nation. As importing advance technology results in increase in productivity of a nation and results in higher output.
When there is increase in domestic income imports will incraese and when there is incraese in foreign income there will be incraese in exports.
4) If in the absence of trade, the U.S. price for bicycles was higher than the world price for bicycles. Then allowing international trade, mean that the U.S. would import bicycles.
This will result in increase in benefits to consumers of bicycles and results in losses to domestic producers of bicycles as they will lose this market to foreign producers. If the benefits to consumer is larger than producer of bicycles then the gains would be greater than losses and vice versa.
5) The commonly used argument for use of tariffs is that it results in higher price of imports. It is kind of a tax on imports
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