Suppose Home and Foreign are engaged in free trade (no tariffs in place). With t

Question

Suppose Home and Foreign are engaged in free trade (no tariffs in place). With the aid of diagrams for the Home, Foreign and World markets, illustrate the free trade equilibrium. Now suppose that the Foreign country experiences technological progress which reduces the cost of producing the good. Illustrate the new free trade equilibrium. What impact will this technological progress have on the welfare of consumers and producers in the Home country? Will the Home country as a whole be better or worse-off? Briefly explain.

Explanation / Answer

Home and Foreign engage in free trade with no tariffs

During this period we have to suppose that home and foreign countries are equal in capabilities

Suddenly foreign countries gets technologically advanced and now capable of producing goods at cheaper price.

Equilibrium shifts towards foreign side and more consumer will likely buy foreign products which are cheaper. This will lead to reduction of sales for home companies leading to job losses at home.

As free trade is there we cannot impose tarrifs and we will continue to loose jobs till we shut down the whole factory.

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