Question

Suppose the world price of bicycles is below the domestic price in a small open economy.

a. (3) In that small open economy, who would benefit from free trade? Briefly explain.

b. (3) In that small open economy, who would be hurt from free trade? Briefly explain.

c.(3) Who would benefit from a tariff on bicycles? Briefly explain.

Answer 1

a. Consumers will benefit from free trade because now they will have to pay a smaller price for an identical product. The imported bicycle will be preferred by everyone because it is cheaper to buy.

b. Producers will be hurt by free trade because customers will prefer cheap imported bicycles. Now some of them cannot sell at the cheap price and will have to exit the market while others will see their revenues and profit dip.

c. A tariff is a tax, the government will see its revenues increase from this imported bicycle. so they will benefit from it. The tariffs mean the price of imported bicycle will increase and therefore producers will benefit too. Some who left may return, others will see a rise their revenues and profits to