Economics Assignment: Trade, Tariffs, and Market Analysis

This economics assignment delves into the complexities of international trade and its effects on domestic markets. It begins by examining the impact of free trade on the U.S. domestic steel market, analyzing changes in consumer and producer surplus. The assignment then explores the consequences of imposing tariffs, illustrating welfare losses and the protection of infant industries. Furthermore, it investigates the impact of tariffs on both the domestic and exporting markets, discussing price changes and welfare implications for consumers and producers in each region. The assignment concludes by highlighting the benefits of free trade, such as specialization based on comparative advantage and increased consumption opportunities, emphasizing the advantages of trade over autarky.

Running head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the student
Name of the university

1ECONOMICS ASSIGNMENT
Table of Contents
Answer 2:...................................................................................................................................2
Answer 3:...................................................................................................................................4
References:.................................................................................................................................6

2ECONOMICS ASSIGNMENT
Price of domestic steel
Domestic supply
Domestic demand
World Price
Pd
Pw
A
B
C
Quantity of steel
O
D
Answer 2:
i)
Figure 1: Demand and supply of U.S domestic steel market under free-trade
Source: (created by author)
The area of consumer surplus after free trade is (A+B+D) while the area of producer
surplus is C.
After the market shifts from the state of autarky to free trade, consumers of importing
market become winner and producers loss (Baldwin and Robert-Nicoud 2015). This happens
as world price goes below the domestic price level. Thus, consumers need to pay fewer
amounts for purchasing steels. On the other side, producers loss as they sell their products at
lower prices, which is lower compare to their desired price level.

3ECONOMICS ASSIGNMENT
Price of domestic steel
Domestic supply
Domestic demand
World Price
Pd
Pw
A
B
C
Quantity of steel
O
D
Price after tariffPt
F
Welfare loss
ii)
Figure 2: Imposition of tariff on the U.S domestic steel market
Source: (created by author)
ii) After imposition of tariff, consumer surplus becomes (A+B+D) while producer surplus
becomes (F+C). Moreover, the country faces welfare loss by imposition of tariff on imports
(Nimon and Beghin 2017). In the above diagram, two arrow sign show the area of welfare
loss.
iii)
Protection of infant industry: Through restricting international trade, a country can
protect its infant industries from foreign markets. Infant industries are referred as new
industries with small scale of production and cannot archive their economies of scale
(Beverelli, Fiorini and Hoekman 2017). Thus, they are not ready to compete with other large-
scale industries in the world market.
Protection of employment: By applying trade restrictions, a country can protect its
employment opportunity (Nimon and Beghin 2017). Under this situation, domestic industries

4ECONOMICS ASSIGNMENT
Pft
A
B
E
CD
F
Price
Output
H
Pte
create job opportunities for their domestic people and this in turn helps the country to reduce
its unemployment level. Through protection, other foreign people cannot take job within
domestic market.
Answer 3:
Figure 3: Impact of imposition of tariff on domestic market
Source: (created by author)
After imposition of tariff, price in domestic market increases while price in exporting
market decreases. Consequently, consumers of exporting country gets excess amount of
welfare by increasing their consumer surplus by decreasing price level (Bagwell and Staiger
2016). However, due to this decreasing price, the amount of producer surplus in domestic
market decreases. Moreover, the government of exporting country cannot experience any
economic benefit or loss due to this tariff imposition on foreign market. After imposition of
tariff exporting country can consumer product with cheaper prices.
ii) Firstly, through free trade, a country can specialise in on some particular product at which
it has comparative advantage (Winston and Yan 2015). Secondly, free trade helps both

5ECONOMICS ASSIGNMENT
exporting and importing country to increase consumptions by getting more amount of food
compare through trade to their autarky position. Hence, these two points show that free trade
is better than no trade. According to Ricardo, under free trade, a country can gain by
producing the product in which it has comparative advantage.

6ECONOMICS ASSIGNMENT
References:
Bagwell, K. and Staiger, R.W., 2016. The design of trade agreements. In Handbook of
Commercial Policy (Vol. 1, pp. 435-529). North-Holland.
Baldwin, R. and Robert-Nicoud, F., 2015. A simple model of the juggernaut effect of trade
liberalisation. International Economics, 143, pp.70-79.
Beverelli, C., Fiorini, M. and Hoekman, B., 2017. Services trade policy and manufacturing
productivity: The role of institutions. Journal of International Economics, 104, pp.166-182.
Nimon, W. and Beghin, J., 2017. Ecolabels and international trade in the textile and apparel
market. In Nontariff Measures and International Trade (pp. 321-326).
Winston, C. and Yan, J., 2015. Open Skies: Estimating Travelers' Benefits from Free Trade
in Airline Services. American Economic Journal: Economic Policy, 7(2), pp.370-414.