1. The U. S. has committed itself to creating a free trade zone between the U.S.
ID: 1210930 • 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?
6.How do subsidies distort trade patterns and lead to inefficiencies?
Explanation / Answer
1)NAFTA the north american free trade agreement like canada, mexico ,canada believes in creating a trilateral trade bloc in north america.with NAFTA making upto 21% olf GDP share for US .The canada trade has been very contorversial to have a more free trade agreements ,the US Mexico tariffs has been free to a larger extent except for certain for some US agricultural exports to mexico and mosst trade has been duty free .
2)Law of comparative advantage states that the country has a better and economically efficient advantage in production .It depends on whether the country has a better opportunity cost of production.
3) The economic strategy means the idea or planning country does for an economically efficient policies . Higher export means that the country has higher flow on money and therei s BOPsurplus .But high amount of export also means that the country is not focusing on growth of their domestic productions and their is less options for the domestic country .
4) Allowing international trade means that the country has better pricing from the world trade than domestic prices , when there is no trade country will hve to suffer high prices and this will lead to inefficiency.But with trade countries can import goods for a better world price and gain advantage from trade .With the import consumers will gain by getting cheap prices but the government losses on its BOP surplus .
5)Tariff leads to dead weight loss , distortion , fall in advantage and revenue generations for the government .Howver excessive tariffs can also hamper the growth of the developing countries as it would attract less investors .
5)Subsidies lead to inefficieny because government lose on their revenue generation and specially for an exporting country it becomes more difficult as they will have to supply more at lower prices compared to the demand that they face , Hence subsidies also have a negative effect on patterns of trade .
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