Question

The table below represents Portugal's daily supply and demand for gloves (in pairs). Portugal is a small nation that is unable to affect the world price of gloves. On Graph paper, draw these supply and demand schedules to answer the questions below. Quantity Supplied Quantity Demanded S Price /Pair 0 0 18 2 16 2 4 14 3 6 12 4 8 10 5 10 8 6 12 6 7 14 4 8. 16 2 9 18 0 A. Assume that Germany and France can supply gloves to Portugal at $2 and $3. Respectively. Assume also that there are no quality differences between German and French gloves. How many daily pairs of gloves does Portugal consume, produce domestically, and import? From which country does Portugal import gloves? B. Assume now that Portugal levies a 100 % non-discriminatory ad-valorem tariff on imported gloves. How many pairs daily of gloves will Portugal consume, produce domestically, and import after this tariff? From which nation will Portugal import such gloves? c. Suppose that Portugal now forms a Customs Union with France. Calculate the trade creation and the trade diversion effects of this Customs Union. Please illustrate these effects on your graph. (The tariff on goods from non-member nations remains in effect.)

Answer 1

a. With free trade, Germany would . exports gloves to Portugal because êt can offer cheaper pnce. llnder this condition, Portugal would Produce 2 ceníts gloves § consume 9 units gloves and import I units gloves.

b. With 100-percent non-discoiminatory tariff on gloves import, Germany is the nation exports gloves to Portugal, The Production equale 3 unito gloves, consumption equals 8 unite gloves, and impost quantity equals 5 units o 1 2 3 4 í 6 7 8 9 10 11

c. If Portugal levies a 100-percent non-déscriminary tariff on its glove imports: Germany: Portugal would produce & Consume 10, & import 2. France : Portugal would produce 6, - Consume 12 and import 6. So Germany export gloves to Portugal. According to the curve and graph, the trade-creation effect of the customers letion : 2+1 x } = 2 2+2 According to the curves and groph, the trade diversion effect of the customs union. 2+1=2 .

According to the trade- diversion effect & trade-creation effect, the ouer all effect equal to 2-2=0.