Question

2. The table below shows the prices in Canada of cotton towels produced in the United States, Canada, and Bangladesh. Assume that all cotton towels are identical. (8 marks) Producing Country Canada United States Bangladesh Canadian Price ($) Without Tariff 4.75 4.50 4.00 Canadian Price ($) With 20% Tariff 4.75 5.40 4.80 a. Suppose Canada imposes a 20 percent tariff on imported towels from any country. Assuming that Canadians purchase only the lowest price towels, from which country will Canada buy towels? b. Now suppose Canada eliminates tariffs on towels from all countries. Which towels will Canada now buy? c. Canada and the United States now negotiate a free-trade agreement that eliminates all tariffs between the two countries, but Canada maintains the 20 percent tariff on other countries. Which towels now get imported into Canada? d. Which of the situations describes above is called trade creation and which is called trade diversion?

Answer 1

a) After the impositon of tariff of 20% on imported towels Canada made towels are cheaper therefore, Canadians will buy Canada made towel.

c) After Canada Preoducing Countries the trade agreement between & USA Canadian price After Canada - USA baru ment without tecliff 20% and 20% tariff an ather Counteres 4.75 4.75 4.50. 4.50 H,oo ☆ 4.80 Canada USA Bangladesh the Clearly USA made tawels are cheap. Therefore, Canadians will buy USA maiell taniels d) Trade creation situation - . When Canada eliminates the tariff of 20% Tiade diversion eitiation - When Canada made an agreement with USA. which divented the trade from Bangladlish to U.S.A. 2020/3/27 00:27

b) After Elimination of tariffs Bangladesh made towels are cheaper therefore Canadian's will buy Bangladesh made towels.

c) Canadian's will buy USA made towels

d) in the below picture