QUESTION 2 This figure shows demand and supply for a product in country A, which

Question

QUESTION 2 This figure shows demand and supply for a product in country A, which is interested in engaging in international trade. The import price from country B is $3 and from country C is $4. Country A imposes a fixed tariff of $2 per unit of import. Answer the following questions based on these assumptions. Price Demand Supply 0 .M Based on information provided in the figure above, if country A decides to enter into a free trade agreement with country C, we will observe a case of a. Trade Diversion O b. Trade Normalization c. Trade creation O d. Trade Liberalization

Explanation / Answer

a> Trade diversion

Reason

Trade diversion is an economic term related to international economics in which trade is diverted from a more efficient exporter towards a less efficient one by the formation of a free trade agreement or a customs union. Here

Country C is less efficient than country B, but due to free trade with C, the overall price of the goods imported from C will be lesser.

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