Question

(25pts) The following two questions concern the desirability of standard trade policy prescriptions.

(a) (15pts) List conditions under which the US would end up overall better off with a tariff that under free trade. Be explicit. Use a diagram of equilibrium in world markets that is consistent with this outcome. Identify areas corresponding to gains and losses (to the US) from the tariff.

(b) (10pts) List conditions under which the US would end up overall better off with an export subsidy than under free trade. Use a diagram of equilibrium in world markets to support your answer.

Answer 1

Solution A

USA can end up better under free trade where it can freely trade goods in which they have low comparative advantage and higher quality and low priced goods and hence drives competitiveness .

Solution B

USwill have better off conditions under export subsidy when goods it exports are not readily available or are expensive in world markets. Also when such goods have high demand in world markets and when US has comparative advantage of it.

Having free trade will reduce effectiveness of such goods.

DIAGRAMMATIC GRAPHS FOR BOTH SOLUTION BELOW. PLEASE CHECK CAREFULLY.