The chapter on “why trade is not as high as it should be” identified currency costs as representing 14%
of the border-related costs that contributed to the total of 74% markup represented by trade costs, in
the final price of goods.
a) To what extent do you think then
that a currency union such as the
Euro area would increase free trade,
compared to reducing tariff and nontariff barriers? b) How would you reconcile your
answer to part a when you consider
the trade data in the adjoining figure
showing Euro-area trade before and
after the Euro was created in 1999? Note: DK, SE and UK are European countries that do
not use the Euro currency, but are part of the European Union. Intra-euro means trade
between countries that use the Euro currency; extra-euro means trade by Euro-currency
countries with the rest of the world. (DK is Denmark, SE is Sweden and UK is the United
Kingdom- difference between UK and Great Britain by the way? Without googling of
Wikipedia!) Figure 1 below describes the hypothetical demand (D) and supply curve (S) for sugar in small country X.
Assume that autarky (no trade) equilibrium price for sugar is $540. Under free trade, country X faces a
constant world price of sugar equal to $400 per ton. At the free trade price, consumption is 40 tons,
while production is 5 tons. The leader of this country, not having had the fortune of attending Nova,
tries to protect domestic producers by imposes a tariff rate import quota of 5 tons- imports within this
quota of 5 tons face a tariff of only 10%, while a 20% tariff applies to any imports beyond the 5-ton
quota. The figure shows the impact of this structure on domestic price, consumption and production.
(see? I’ve already done half your work ) Price ($) Sx 540 480 Sw+ 20%
d 440 e c f Sw+10% g
b a 400 Sw
DX 5 10 15 20 30 35 40 Sugar (Tons) Using the key provided in the figure, answer the following questions. And the answers do not need to
include any numerical calculations….This will speak to the developments of the last week or so where
both Mexico and Canada have raised issues about NAFTA
a. What area represents the increase or decrease in profit of domestic sugar producers?
b. What area represents the dead weight loss to consumers?
c. What portion of this figure represents the revenue generated by the government?
d. What does area ‘d’ in this figure represent? (Hint: NOT government revenue- again speaks to the
impact of government intervention in trade! Put yourself in the role of a business and think through this) Last question! Put yourself in the shoes of the following: Small business owner
Big company like GM
Portfolio investor What is your reaction AT THE FIRM OR MANAGER level in terms of actual actions you will take in
response to the electoral developments and the aftermath of our new administration?
