Microeconomics Assignment | Free Trade Agreement

Added on - 28 May 2020

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Running head: MICROECONOMICSMicroeconomicsName of the StudentName of the UniversityAuthor Note
1MICROECONOMICSTable of ContentsAnswer 1:.........................................................................................................................................2Part A:..........................................................................................................................................2Part B:..........................................................................................................................................2Part C:..........................................................................................................................................4Part D:..........................................................................................................................................5Answer 4:.........................................................................................................................................6Part A:..........................................................................................................................................6Part B:..........................................................................................................................................8Part C:..........................................................................................................................................9References......................................................................................................................................10
2MICROECONOMICSAnswer 1:Under a free trade agreement between Australia and Canada, it is agreed between the twocountries that Australia will be exporting beef to Canada:Part A:If the government of Australia provides an export subsidy to those beef sellers who areexporting beef to Canada, then the export cost of beef will fall, which in turn will help the beefproducers to charge less from the residents of Canada. However, due to the increase in thequantity exported, the domestic price will increase, as the domestic supply will tend to decrease(Gopinath, Helpman and Rogoff 2014). This fall in the domestic supply of beef will lead to anexcess demand for beef in the domestic market of Australia. This excess demand in the domesticmarket, clubbed with the increase in the demand in market of Canada (due to a lower priceattributed to the export subsidy), the sellers will be encouraged to produce and supply more(Gandolfo 2013).Part B:The effects of the export subsidy of the Australian government on beef, on the producersurplus, consumer surplus and the government revenue can be explained with the help of thefollowing demand and supply diagram:
3MICROECONOMICSFigure 1: Impact of export subsidy(Source: As created by the author)As can be seen from the above diagram, Pw shows the equilibrium price level at the freetrade situation, where the excess demand of beef in Canada is equal to the excess supply of thesame in Australia. However, with the imposition of an export subsidy, the price of beef isincreased in Australia, to Ps and the same is decreased in Canada to Ps’ (Dahl 2017). Due to theincrease in the domestic price of beef in Australia, the domestic consumer surplus decreases bythe amount (a+b). Due to the imposition of export subsidy, the producer surplus increases by(a+b+c). As the government provides export subsidy to the producers, the government revenue isactually negative which is of the amount (b+c+d+e+f+g) (Florio 2014).
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