Impact of Trade and Subsidies on Economics: Desklib Study Material

Introductory Economics 1
INTRODUCTORY ECONOMICS
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Introductory Economics 2
QUESTION 1
Australia and Canada have a free trade agreement in which, Australia exports beef to
Canada.
(a) Draw a graph and use it to explain and illustrate the impact of trade on consumers,
producers, and the Australian economy.
Trade agreements are trade ties between countries or regions that boost trade
between them by removing trade barriers such as tariffs and quota. Trade is an important
BeefBeef
ES
BeefBeef
ED

Introductory Economics 3
economic activity that contributes immensely to economic growth of countries (Bos,
2014). The free trade agreement between Australia and Canada has huge impact on
consumers, producers, and their economies. The diagram above illustrates trade between
Australia and Canada. At point Pe, the domestic production of beef in Australia is
equivalent to domestic production. Excess supply is obtained as Qs-Qd and is sold at
prices over price Pe. Trade enables producers to dispose surplus products to domestic and
international markets. Through the free trade agreement between Australia and Canada,
Australia benefits from acquiring more market for its beef products. Australia can
increase production of beef beyond its demand so as to meet international markets. Trade
also creates an opportunity where countries acquire goods from other countries in form of
imports (Dabla-Norris & Duval, 2016).
In Canada, the prevailing beef market price is lower than the market equilibrium
price of the domestic market. The amount of beef products demanded by customers is
greater than amount supplied when retailing prices are lower than Pi. Through importing
beef, Canada benefits by acquiring high quality meet from Australia. Canadians are also
able to obtain a variety of beef products to choose from. The expansion of the economy
occurs in Australia when the beef industry flourishes as a result of the free trade
agreement (Egan & Gumaraes, 2017).Beef farmers and beef processing industries would
grow their businesses and thus lead to economic growth in Australia.
(b) Canada imposed an import quota on Australian beef. Present a graph and explain
how the quota would affect; (i) Price of beef (ii) consumer surplus and producer
surplus (iii) beef importers gain (iv) efficiency of the beef market.

Introductory Economics 4
When Canada impose quotas on Australian beef, it restrict the amount of beef
imported from Australia. The imposition is conducted by limiting the amount of beef
import licenses or fixing a limit on imports. The price of beef in Canada would increase
due to a decline in quantity supplied. A decline in quantity supplied implies that
consumers have access to little amounts of product and thus might have to pay more for
the beef. Local producers of beef would sell more of the product at higher prices.
Consumer surplus is that difference in the amount that customers are willing to pay and
the price that they actually pay (Ehrenberg & Smith, 2016). The import quota imposed by
Canada causes a rise in consumer surplus through area A to D in the graph.
(c) The volume of import quotas on Australian beef is less than Australia’s total export
volume of beef to Canada. Explain how this import quotas would influence the
following factors in Australia. (i) Quantity of beef exported to Canada; (ii) price of
beef (iii) consumer surplus and producer surplus.
When the volume of import quotas of Australian beef exported to Canada is less
Australia’s total beef export to Canada, the quantity of beef exported to Canada would