Question

2) The General Agreement on Trade in Services (GATS) was created inspired by the GATT. The main purpose of the agreement is to guarantee and improve access to services.

a) Assume that the GATS allow for increased trade by liberalizing an effective import quota on grain storage services at the port of Piraeus, Greece. Using a General Equilibrium diagram, model the effect of an increase on services imports by Greece (assume the other good of the economy is manufactured products).

b) Given that services and manufacturing are the two main sectors in the economy, we can assume that manufacturing is capital-intensive, and services is labor-intensive. Analyze the effect of the removing the import quota on services using the H-O model. What happens to prices and quantities? Who wins and who losses from trade in Greece?

c) How your answer in b) would change if labor is the only production factor for both services and manufactured goods? Make the necessary assumptions.

Answer 1

a). The situation can be explain from the following diagram..

GATS allows increase in import by liberalizing quota. Before that Greece was importing B-C amount of service. The prevailing equilibrium price was P1 and quantity was Q1.

Th world supply curve is Sw which is horizontal in nature. After quota being abolished the new supply curve is ABSw. Hence the new equilibrium point will be E2 where price is Pw and quantity is Q4. Hence in this situation Greece will provide 0Q2 amount of service from domestic market and import Q2Q4 amount from abroad.