1 Problem solving: NAFTA (40 points) Assume the following: ·The world has many c

Question

1 Problem solving: NAFTA (40 points) Assume the following: ·The world has many countries The US imports all of its tomatoes (T) from Mexico and Mexico imports all of its cars (C) from the US Initially, becaase of NAFTA, there is free trade in cars and tomatoes between the US and Mexico But,Donald Trump takes the US out of NAFTA 1. Impact on the US due to the US tariff increase on tomatoes associated with backing out of NAFTA (a) Analyae the welfare efects of ths policy Sor the US (ie. the change is COnSuer surplus, producer surplus and goverament revenue) under the assumption that the US is a large impoeting country on the world market for tomatoes. Explain whether the US could benefit from such a policy (b) Analyze the welfare effects of this policy for the US under the assumption that the US is a small importing country on the world market for tomatoes. Explain whether the US could benefit from such a policy 2. Impact on the US due to the higher Mexican tariff on cars associated with dissolution of NAFTA (Note: we did not do this in class, so the aim here is to get you to apply the concepts ahove to a slightly different setting) (a) Analyze the welfare effects of this policy for the US under the assumption that Mexico is a large importing country on the world market for cars. Explain whether the US could benelit from this tariff increase. (b) Analyze the welfare effects of this policy for the US under the assumption that Mexico is a small importing country on the world market for cars. Explain whether the US could benelit from this tariff increase

Explanation / Answer

Ans

1 consumer surplus will fall as prices rise. Due to same reason producer surplus will rise. Govt revenue will rise. But usa is large country and due to less demand Tamatoe prices may fall which turn terms of trade in favour of the country. Nation will then gain

B since fall in consumer surplus is greater than gain in other areas and prices of Tamatoes don't fall, usa losses

2 here usa will see less exports initially. But later due to less demand, prices will fall which will turn terms of trade against usa so usa will loose.Usa could benefit if elasticity of exports is quite high

B USA will see fall in exports. No usa will not gain

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