Project

International Trade Project

In this the world price is $1 which is way below the domestic price of $3. Hence, at $1 domestic supply falls to 1, however quantity demanded in the domestic market rises to 16. This takes place primarily because of the inverse relation of quantity demanded and the direct correlation of quantity supplied with price. Assuming that there are no transport and other costs, domestic supply and demand takes place according to the world price. Since world production is infinite, at $1 the quantity sold will be 16.
c. Assuming that free trade takes place i.e. there is no tariff laid on the goods imported from outside the domestic country. the equilibrium price stays at $1. Quantity supplied domestically is 1 however quantity demanded domestically is 16, which means there is a gap of 15 units of production. This gap is bridged by importing 15 units of the product from the world market. Hence, the output produced by domestic producers is 1 and that by the foreign producers is 15.
Since the domestic price is higher than the world price and the country is an importer of the good, this implies that the rest of the world has a comparative advantage in the production of the good. The country is thus a net importer of the good and thus domestic consumers of the good are better off since they have to pay a lower price.
d. Despite all the benefits of free trade, barriers to free trade do exist. Tariffs are excise taxes imposed on imported goods. As a tariff of $1 per unit is imposed, on one hand it raises the world price to $2 and hence the quantity demanded falls to 11 from 16 and on the other hand, the quantity supplied rises from 1 to 4. The gap between domestic supply and demand falls from 15 to 7. Hence, under $1 tariff situation, a total of 11 units are sold at $2.
Tariffs are imposed primarily for protecting the domestic market. As already seen, the major and immediate impact of tariff is the rise in the price level. Since price is inversely

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