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International Economics: Problem Solving - Assignment Example

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Question 1: a) (b) Under Free trade, country A will import from the low cost world producer i.e. country B at a price of $10 per unit. At a price of $10, following quantities will be demanded and supplied domestically: Country A will import 100 units from country B…
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International Economics: Problem Solving
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International Economics: Problem Solving

Download file to see previous pages... d) If tariff of $10 is imposed, country A will now import from country B at a price of $10 per unit. At a price of $10, following quantity will be imported: Domestic Price in country A will be $10. (e) If tariff of $10 is imposed on both country B and country C, country A will now import from country B at a price of $20 per unit. At a price of $20, following quantity will be imported: Domestic Price in country A will be $20. Question 2: Quotas Quotas are imposed by countries to restrict the flow of imports/exports in a country. A quota represents ceiling on the volume of exports or imports flowing in a country (Cherunilam). The impact of imposing import quotas is generally predictable: prices rise and consumption decrease. Since U.S is a large consumer of sugar, the quotas imposed will lead to a decrease in demand of sugar in the international market. The increase in demand of sugar will lead to a decrease in the world prices of sugar. Hence the quotas on sugar by US may lead to an increase in the prices of sugar in the international market relative to the price that would have existed under free trade. Question 3: NAFTA North American Free Trade Agreement (NAFTA) was signed on 1st January 1994. It is an agreement signed by United States, Mexico and Canada which creating a trade bloc between these countries in North America (Orme). Inclusion of Mexico in NAFTA was the major reason that NAFTA became controversial. NAFTA attempted to regulate the domestic investment policies of a developing country through a pact with an industrial super power (Orme). Many feared that relaxed trade policies between US and Mexico would lead to capital relocation from US to Mexico to take advantage of lower wages, business friendlier policies and lower cost of doing business in Mexico. Relocation of capital from US would resultantly lead to a fall in US wages. Hence, this made the NAFTA agreement controversial amongst the Americans. On the other hand, Canada-US FTA did not receive much attention because of similar economic environment of the two countries. Canadian wages are more or less equal to US wages and have stricter regulatory standards than US regulatory standards. NAFTA was in the best interest of Mexixo and many Americans believed that NAFTA would be detrimental for the US economy whereas Canada-US FTA was not against the interests of the Americans. This is why formation of NAFTA was so controversial but the Canada-US FTA was little noticed. Works Cited Cherunilam, Francis. International Economics. Tata McGraw-Hill Education, 2008. Orme, William A. Understanding NAFTA: Mexico, Free Trade, and the New North America. University of Texas Press, ...Download file to see next pagesRead More
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