Suppose that Canada has domestic firms that could supply its entire market for radios at a...
Suppose that Canada has domestic firms that could supply its entire market for radios at a price of $100, while U.S. firms could supply radios at $60 and Mexico at $50. Suppose that Canada initially has a 33 percent tariff on imports of radios and then forms a free trade area with Mexico. As a result, Canada realizes:
| a. |
Trade creation, no trade diversion, and overall welfare gains |
|
| b. |
Trade creation, trade diversion , and potential overall welfare gains |
|
| c. |
Trade diversion, no trade creation, and potential overall welfare losses |
|
| d. |
Trade creation, no trade diversion, and overall welfare losses |
Homework Answers
Forming a free trade with Mexico (which supplies radio at a lower price of $50 compared to Canada's autarky price of $100), opens up trade.
This leads to trade creation, trade diversion, and potential overall welfare gains.
Correct Ans - b
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