1 Consider the following data detailing the iThing market fo

1. Consider the following data detailing the iThing market for Myland, the high-cost producer, before and after it forms a trade agreement with Ourland. It imposes a tariff of two dollars, t = $2, on iThings regardless of country of origin when there is no trade agreement in place. Also assume the price at which it can acquire iThings from Urland is Pu = $5 and the price at which it can acquire iThings from Ourland is Po = $6.

Units in million.

(a) Graphically depict the iThing market for Myland, clearly denoting prices and imports both before and after the formation of the trade agreement.

(b) How much trade was diverted by this agreement?

c) How much trade was created?

(d) Determine the numerical value of the welfare gain or loss to Myland from forming this trade agreement assuming the trade creation is evenly distributed between the consump- tion effect and the production effect.

Solution

A trade of 100 million units was diverted and 170 million was created.

Welfare Gain = 270*6 - 100*(5+2).

= 920.