Macroeconomics Canada in the Global

Environment Canadian 9th Edition

Parkin Solutions Manual
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 C h a p t e r
7 GLOBAL MARKETS
IN ACTION

Answers to the Review Quizzes

Page 154
1. Describe the situation in the market for a good or service that Canada imports.
The goods and services Canada imports are those in which Canada has a higher opportunity
cost of production relative to other countries. In those markets the Canadian no-trade price is
higher than the world price. With trade, the quantity produced in Canada is less than the
quantity consumed and the difference is imported.
2. Describe the situation in the market for a good or service that Canada exports.
The goods and services Canada exports are those in which Canada has a lower opportunity
cost of production relative to other countries. In those markets the Canadian no-trade price is
lower than the world price. With trade, the quantity produced in Canada exceeds the quantity
consumed and the excess is exported.

Page 156
1. How is the gain from imports distributed between consumers and domestic
producers?
Consumers gain consumer surplus from imports and domestic producers lose producer
surplus from imports.
2. How is the gain from exports distributed between consumers and domestic
producers?
Consumers lose consumer surplus from exports and domestic producers gain producer
surplus from exports.
3. Why is the net gain from international trade positive?
The net gain from international trade is positive because the gain to the winners exceeds the
losses to the losers. In the case of an imported good, all the loss of producer surplus is
transferred to consumers as consumer surplus. Consumers also gain additional consumer
surplus from the units imported. The gain of consumer surplus exceeds the loss of producer
surplus so that the net surplus increases. The situation is similar for exports: The gain of
producer surplus exceeds the loss of consumer surplus.

Page 163
1. What are the tools that a country can use to restrict international trade?
A country can use tariffs, import quotas, other import barriers such as health, safety, and
regulation barriers, and voluntary export restraints to restrict international trade. Export
subsidies, which are illegal, bring gains to domestic producers but result in underproduction
in the rest of the world.

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94 CHAPTER 7

2. Explain the effects of a tariff on domestic production, the quantity bought, and the
price.
A tariff raises the domestic price of the product. The higher price increases domestic
production and decreases the quantity bought.
3. Explain who gains and who loses from a tariff and why the losses exceed the
gains.
Domestic consumers lose consumer surplus from a tariff. Domestic producers gain producer
surplus from a tariff. The government also gains revenue from a tariff. But the gain in
producer surplus plus the gain in government revenue is less than the loss of consumer
surplus, so a tariff creates a deadweight loss.
4. Explain the effects of an import quota on domestic production, consumption, and
price.
An import quota raises the domestic price of the product. The higher price increases
domestic production and decreases domestic purchases.
5. Explain who gains and who loses from an import quota and why the losses
exceed the gains.
Domestic consumers lose consumer surplus from the import quota. Domestic producers gain
producer surplus from the import quota. The importers also gain additional profit from the
import quota. But the gain in producer surplus plus the importers’ profits is less than the loss
of consumer surplus, so an import quota creates a deadweight loss.

Page 167
1. What are the infant industry and dumping arguments for protection? Are they
correct?
The attempt to stimulate the growth of new industries is the infant-industry argument for
protection, which states that it is necessary to protect a new industry from import competition
to facilitate the growth of that industry, making it competitive in the world markets. This
argument is based on the idea that as firms mature they become more productive. However
this argument for protection only works if the benefits also spill over into other industries and
other parts of the economy. This is rarely the case, as the entrepreneurs of infant industries
and their financial supporters take this risk into account and all returns usually accrue only to
them, not to other industries. And it is more efficient to subsidize the infant industry needing
protection than it is to protect it by restricting trade.
The dumping argument for protection states that a foreign firm is selling its exports at a lower
price than its cost of production. Foreign firms trying to monopolize the international market
may use this practice. Once the competition is gone, the foreign firm will raise prices and
reap profits. This argument fails for several reasons. First, it is virtually impossible to detect
the occurrence of dumping since it is impossible to verify a firm’s production costs. The test
most commonly used is if the firm’s price when it exports is lower than its domestic price.
This test only examines the supply side of the two markets and ignores the demand side. If
the domestic market is inelastic and the export market is elastic, then it is natural for a firm to
price the domestic goods higher than the exports. Second, it is difficult to see how a global
firm could have a monopoly for the goods or services it exports. There are too many foreign
suppliers (and potential suppliers), making global competition too extensive for a monopoly to
exist in the global market. And, even if there is global monopoly it is more efficient to regulate
it than to impose trade restrictions on its products.

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 GLOBAL MARKETS IN ACTION 95

2. Can protection save jobs and the environment and prevent workers in developing
countries from being exploited?
There are many myths about trade restrictions. The problem mentions three of them, all false
reasons often offered as reasons to restrict international trade. These arguments are:
Trade restrictions save domestic jobs: Free international trade does cost jobs in the import-
competing markets. But this argument ignores the fact that trade also creates other jobs.
Free trade brings about a global rationalization of labour and allocates labour resources
to their highest-valued activities.
Trade restrictions penalize lax environmental standards: Not all developing countries have
lax environmental standards. Also, a clean environment is a normal good. Countries that
are relatively poor and have lax pollution standards do not care as much about the
environment because imposing clean air, water, and land standards have a high
opportunity cost that will slow economic development. The best way to encourage
environmental quality is not to restrict economic development but to encourage rapid
economic growth, which will more quickly increase citizen demand for a cleaner
environment in developing countries.
Trade restrictions prevent rich countries from exploiting poorer countries: Importing goods
made in countries with low wage levels increases the demand for labour in those
countries, increasing the number of jobs available and raising wages over time. The
more free trade that occurs with these countries, the more quickly the wages will rise and
the working conditions will increase in quality and safety.
3. What is offshore outsourcing? Who benefits from it and who loses?
Offshore outsourcing occurs when a firm in Canada buys finished goods, components, or
services from firms in other countries. Workers who have skills for jobs that have been sent
abroad lose from offshore outsourcing. Consumers who consume the goods and services
produced abroad and imported into Canada benefit.
4. What are the main reasons for imposing a tariff?
There are two main reasons for imposing tariffs on imports. First the government receives
tariff revenues from imports, which can be useful when revenues from income taxes and
sales taxes are less effective ways of gaining government revenue. Second rent seeking by
individuals in industries that would be hurt by foreign competition can influence the
government to impose tariffs.
5. Why don’t the winners from free trade win the political argument?
Trade restrictions are enacted despite the inherent inefficiency because of the political
actions of rent-seeking groups, which fear that foreign competition might have a negative
impact on their industry, firm, or jobs. The anti-trade groups are easily organized and have
much to gain from trade restrictions but the millions of consumers, who would win from free
trade are difficult to organize because each individual has only a small amount of loss when
trade restrictions are imposed.

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96 CHAPTER 7

Answers to the Study Plan Problems and Applications

Use the following information to work Price Quantity Quantity
Problems 1 to 3. (dollars per demanded supplied
Wholesalers buy and sell roses in container) (millions of containers per year)
containers that hold 120 stems. The 100 15 0
table provides information about the 125 12 2
wholesale market for roses in North 150 9 4
America. The demand schedule is the 175 6 6
wholesalers’ demand and the supply 200 3 8
schedule is the North American rose 225 0 10
growers’ supply. Wholesalers can buy roses at auction in Aalsmeer, Holland, for $125
per container.
1. a. Without international trade, what would be the price of a container of roses and
how many containers of roses a year would be bought and sold in North
America?
Without international trade, in North America the price of a container of roses is $175 and 6
million containers of roses are bought and sold.
b. At the price in your answer to part (a), does North America or the rest of the
world have a comparative advantage in producing roses?
The price of roses in North America exceeds the price in the rest of the world, so the rest of
the world has a comparative advantage in producing roses.
2. If North American wholesalers buy roses at the lowest possible price, how many
do they buy from North American growers and how many do they import?
The price of roses in North America is $125 per container. At this price, North American rose
growers supply 2 million containers a year and North American wholesalers demand 12
million containers of roses. North American wholesalers buy the 2 million containers from
North American growers and purchase 10 million containers from foreign sources, which are
imported into North America.
3. Draw a graph to illustrate the North
American wholesale market for roses.
Show the equilibrium in that market with
no international trade and the equilibrium
with free trade. Mark the quantity of roses
produced in North America, the quantity
imported, and the total quantity bought.
In Figure 7.1, the equilibrium without
international trade is determined at the
intersection of the demand curve and the
supply curve. Without international trade the
equilibrium price is $175 per container and 6
million containers a year are bought and
produced. With international trade the world
price is $125 a container. The quantity
produced in North America is 2 million
containers and the quantity bought in the
North America is 12 million containers.

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 GLOBAL MARKETS IN ACTION 97

Imports into North America equal the difference between the quantity bought and the quantity
produced, which is 10 million containers.
4. Use the information on the North American wholesale market for roses in Problem
1 to:
a. Explain who gains and who loses from free international trade in roses
compared to a situation in which North Americans buy only roses grown in the
United States.
North American rose wholesalers, who are
the consumers in the problem, gain from free
international trade. North American rose
growers lose from free international trade.
b. Draw a graph to illustrate the gains and
losses from free trade.
Figure 7.2 illustrates the market with free
trade. Consumer surplus before international
trade is equal to area A; after international
trade consumer surplus is equal to area A +
area B + area C. Producer surplus before
international trade is equal to area B + area
D; after international trade producer surplus is
equal to area D.
c. Calculate the gain from international
trade.
The gain from international trade is area C in
Figure 7.2. It is equal to ½  ($175  $125) 
(10 million containers) which is $250 million.
Use the information on the North American wholesale market for roses in Problem 1 to
work Problems 5 to 10.
5. If North America puts a tariff of $25 per container on imports of roses, explain
how the North American price of roses, the quantity of roses bought, the quantity
produced in North America, and the quantity imported changed.
The North American price of roses rises from $125 per container (the price with free trade) to
$150 per container. The quantity of roses produced in the United States increases from 2
million containers (the quantity produced with free trade) to 4 million containers. The quantity
of roses consumed in the United States decreases from 12 million containers (the quantity
consumed with free trade) to 9 million containers. The quantity imported decreases from 10
million containers to 5 million containers.
6. Who gains and who loses from this tariff?
North American rose consumers lose from the tariff. North American rose producers gain
from the tariff. The government gains revenue from the tariff.

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7. Draw a graph of the North American market for roses to illustrate the gains and
losses from the tariff and on the graph
identify the gains and losses, the tariff
revenue, and the deadweight loss
created.
Figure 7.3 shows the effect of the tariff. The
tariff per container is equal to the height of the
light gray arrow. Before the tariff, North
American consumer surplus is equal to area
A + area B + area C + area E + area F. After
the tariff North American consumer surplus is
equal to area A. North American consumers
lose consumer surplus equal to area B + area
C + area E + area F. Before the tariff North
American producer surplus is equal to area
G. After the tariff North American producer
surplus is equal to area G + area B. North
American producers gain producer surplus
equal to area B. The government gains tariff
revenue equal to area E. The deadweight
loss from the tariff is equal to area C + area F.
8. If North America puts an import quota on roses of 5 million containers, what
happens to the North American price of roses, the quantity of roses bought, the
quantity produced in North America, and the quantity imported?
The North American price of roses rises to $150 per container. 9 million containers of roses
are purchased in North America and 4 million containers of roses are produced in North
America. The difference, 5 million containers, is imported into North America.
9. Who gains and who loses from this quota?
North American rose growers and importers of roses gain from the quota. North American
rose wholesalers lose from the quota.
10. Draw a graph to illustrate the gains and
losses from the import quota and on the
graph identify the gains and losses, the
importers’ profit, and the deadweight loss.
Figure 7.4 shows the effect of the import quota.
The amount of the quota is equal to the length of
the gray arrow. Before the quota North American
consumer surplus is equal to area A + area B +
area C + area E + area F. After the quota, North
American consumer surplus is equal to area A.
North American consumers lose consumer
surplus equal to area B + area C + area E + area
F. Before the quota North American producer
surplus is equal to area G. After the quota North
American producer surplus is equal to area G +
area B. North American producers gain producer
surplus equal to area B. With the quota, the

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 GLOBAL MARKETS IN ACTION 99

importers of roses make a profit equal to area E. The deadweight loss from the import quota
is equal to area C + area F.
11. Chinese Tire Maker Rejects Charge of Defects
U.S. regulators ordered the recall of more than 450,000 faulty tires. The Chinese
producer of the tires disputed the allegations and hinted that the recall might be
an effort to hamper Chinese exports to the United States.
Source: International Herald Tribune, June 26, 2007
a. What does the news clip imply about the comparative advantage of producing
tires in the United States and China?
Because the tires were produced in China, the news clip suggests that China has the
comparative advantage in producing tires.
b. Could product quality be a valid argument against free trade? If it could, explain
how.
Product quality is not a valid argument against free trade. Quality is a valid concern for
consumers. If consumers cannot judge quality themselves, then government inspection might
be necessary. Domestic producers could easily assert that the imported good lacks some
essential quality characteristic and should be prohibited in the U.S. market. Product quality
concerns raised by domestic producers can also be used to raise worry amongst U.S.
consumers about imported goods. Domestic producers would have a never-ending incentive
to complain about quality defects of imported goods.

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Answers to Additional Problems and Applications

12. Suppose that the world price of eggs is $1 a dozen, Canada does not trade
internationally, and the equilibrium price of eggs in Canada is $3 a dozen. Canada
then begins to trade internationally.
a. How does the price of eggs in Canada change?
The price of eggs in Canada falls.
b. Do Canadians buy more or fewer eggs?
As a result of the lower price, Canadians buy more eggs.
c. Do Canadian egg farmers produce more or fewer eggs?
As a result of the lower price, Canadian egg farmers produce fewer eggs.
d. Does Canada export or import eggs and why?
Canada imports eggs. At the lower world price, the quantity of eggs demanded increases
while quantity supplied decreases. The difference is made up by imports.
13. Suppose that the world price of steel is $100 a tonne, India does not trade
internationally, and the equilibrium price of steel in India is $60 a tonne. India then
begins to trade internationally.
a. How does the price of steel in India change?
The price of steel in India rises to equal the world price.
b. How does the quantity of steel produced in India change?
Producers respond to the higher price by increasing the quantity of steel produced.
c. How does the quantity of steel bought by India change?
Steel users in India respond to the higher price by decreasing the quantity of steel bought.
d. Does India export or import steel and why?
Because the price of steel in India is lower than the world, India has a comparative
advantage in the production of steel. India exports steel.
14. A semiconductor is a key
Price Quantity Quantity
component in your laptop, (dollars per demanded supplied
cellphone, and iPad. The table unit) (billions of units per year)
provides information about the 10 25 0
market for semiconductors in 12 20 20
Canada. Producers of 14 15 40
semiconductors can get $18 a unit 16 10 60
on the world market. 18 5 80
a. With no international trade, what 20 0 100
would be the price of a semiconductor and how many semiconductors a year
would be bought and sold in Canada?
With no international trade the price of a semiconductor in Canada is $12 per unit. 20 billion
units are bought and sold in Canada.
b. Does Canada have a comparative advantage in producing semiconductors?
Canada has a comparative advantage in producing semiconductors because the Canadian
price is lower than the price in the world market.
15. Act Now, Eat Later
The hunger crisis in poor countries has its roots in Canadian, U.S., and E.U.
policies of subsidizing the diversion of food crops to produce biofuels like corn-

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 GLOBAL MARKETS IN ACTION 101

based ethanol. That is, doling out subsidies to put the world’s dinner into the gas
tank.
Source: Time, May 5, 2008
a. What is the effect on the world price of corn of the increased use of corn to
produce ethanol in Canada, the United States, and Europe?
The use of corn to produce ethanol increases the demand for corn, which raises the world
price of corn.
b. How does the change in the world price of corn affect the quantity of corn
produced in a poor developing country with a comparative advantage in
producing corn, the quantity it consumes, and the quantity that it either exports
or imports?
The higher world price of corn decreases the consumption of corn and increases the
production of corn in poor developing countries. Because the country has a comparative
advantage it will export corn. The higher price leads the country to increase its exports.
16. Draw a graph of the market for
corn in the poor developing
country in Problem 15(b) to show
the changes in consumer surplus,
producer surplus, and deadweight
loss.
Figure 7.5 shows the situation in the
poor country that exports corn. With
the initial lower price, the country
produces 60 million baskets, exports
20 million baskets, and consumes
40 million baskets. The consumer
surplus is equal to area A + area B
and the producer surplus is equal to
area E. After the world price of corn
rises to $8 per basket, the country
produces 80 million baskets of corn,
exports 60 baskets million bushels,
and consumes 20 million baskets.
Consumer surplus decreases to
area A and producer surplus
increases to area B + area C + area E. There is no deadweight loss.

Use the following news clip to work Problems 17 and 18.

South Korea to Resume Canadian Beef Imports
South Korea will reopen its market to most Canadian beef. South Korea banned
imports of beef in 2003 amid concerns over a case of mad cow disease. The ban closed
what was then the fourth-largest market for Canadian beef, valued at $50 million a year.
Source: Bloomberg, June 28, 2011

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17. Explain how South Korea’s import ban on Canadian beef affected beef
producers and consumers in South Korea. Draw a graph of the South Korean
market for beef to show how this ban changes consumer surplus and producer
surplus and creates deadweight loss.
The South Korean ban raised the price of beef in South Korea. With the higher price
production increased in South Korea, which
made South Korean producers better off, and
consumption decreased in South Korea, which
made South Korean consumers worse off.
Figure 7.6 shows the effect of South Korea’s
import ban. Prior to the ban the price of beef in
South Korea was $4 a kilogram. At this price
the quantity consumed in South Korea is 12
million kilograms of beef a year and the
quantity produced in South Korea is 2 million
kilograms of beef a year. The difference, 10
million kilograms of beef a year, is imported.
Consumer surplus in South Korea is equal to
area A + area B + area C and producer
surplus in South Korea is equal to area E.
With the import ban, the price of beef in South
Korea rises to $6 a kilogram. At this price 6
million kilograms of beef a year are consumed
in South Korea and 6 million kilograms of beef
a year are produced in South Korea. There is
no imports. Consumer surplus in South Korea
shrinks to area A and producer surplus grows to equal area B + area E. There is now a
deadweight loss, which is equal to area C.
18. Assuming that South Korea is the only
importer of Canadian beef, explain how
South Korea’s ban on beef imports affected
beef producers and consumers in Canada.
Draw a graph of the market for beef in
Canada to show how this ban changes
Canadian consumer surplus and producer
surplus from beef and creates deadweight
loss.
With the South Korean ban, Canada no longer
exports beef. (Recall the assumption that South
Korea is the only importer of Canadian beef.) In
Canada the price of beef falls to the no-trade
price. Canadian consumption increases and
Canadian production decreases so Canadian
consumers are better off and Canadian producers
are worse off.
Figure 7.7 shows the situation in the Canadian
market for beef. With trade the price of beef is $4

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 GLOBAL MARKETS IN ACTION 103

a kilogram. Canada produces 30 million kilograms of beef, consumes 20 million kilograms of

beef, and exports the difference. At this price consumer surplus in Canada is equal to area A
and producer surplus is equal to area B + area C + area E. When South Korea eliminates
Canadian beef exports, the price falls to $3.50 a kilogram, the no-trade price. Canadian
consumer surplus increases from area A to area A + area B. Canadian producer surplus falls
from area B + area C + area E to only area E. The deadweight loss equals area C.
Use the following information to work Problems 19 and 20.
Before 1995, trade between Canada and Mexico was subject to tariffs. In 1995, Mexico
joined NAFTA and all Canadian and Mexican tariffs have gradually been removed.
19. Explain how the price that Canadian consumers pay for goods from Mexico and
the quantity of Canadian imports from Mexico have changed. Who are the winners
and who are the losers from this free trade?
With NAFTA, the prices that Canadian consumers pay for goods from Mexico have fallen and
the quantity of imports from Mexico have increased. Winners from this free trade are Mexican
producers of goods exported to Canada and Canadian consumers of these goods. Losers
are Mexican consumers of the goods and Canadian producers of the goods.
20. Explain how the quantity of Canadian exports to Mexico and the Canadian
government’s tariff revenue from trade with Mexico have changed.
The prices of Canadian goods in Mexico have fallen and the quantity of Canadian goods
exported to Mexico has increased. The Canadian government’s tariff revenue from tariffs
imposed on trade with Mexico decreased.
21. Suppose that in 2014, tomato growers in Ontario lobby the Canadian government
to impose an import quota on Mexican tomatoes. Explain who in Canada would
gain and who would lose from such a quota.
Canadian tomato growers gain from such a quota. The importers who hold the quota rights
also gain. Canadian consumers of tomatoes lose from such a quota.
Use the following information to work Problems 22 and 23.
Suppose that in response to huge job losses in the Canadian textile industry, the
Government of Canada imposes a 100 percent tariff on imports of textiles from China.
22. Explain how the tariff on textiles will change the price that Canadians pay for
textiles, the quantity of textiles imported, and the quantity of textiles produced in
Canada.
The tariff raises the Canadian price of textiles. The quantity of textiles bought in Canada
decreases and the quantity produced increases. Imports of textiles into Canada decrease.
23. Explain how the Canadian and Chinese gains from trade will change. Who in
Canada will lose and who will gain?
The decrease in trade means that the Canadian and Chinese gains from trade decrease. In
Canada, Canadian producers gain from the tariff. The Canadian government also gains
revenue from the tariff. Canadian textile consumers lose.

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Use the following information to work Problems 24 and 25.

With free trade between Australia and Canada, Australia would export beef to Canada.
But Canada imposes an import quota on Australian beef.
24. Explain how this quota influences the price that Canadians pay for beef, the
quantity of beef produced in Canada, and the Canadian and the Australian gains
from trade.
The quota raises the price of beef in Canada. By raising the Canadian price, the quota
increases the quantity of beef produced in Canada and decreases the quantity of beef
consumed in Canada. The Canadian and Australian gains from trade decrease.
25. Explain who in Canada gains from the quota on beef imports and who loses.
Canadian beef producers gain from the quota. The people who hold the import quota rights
also gain. Canadian beef consumers lose from the quota.

26. Trading Up
The cost of protecting jobs in uncompetitive sectors through tariffs is high:
Saving a job in the sugar industry costs American consumers $826,000 in higher
prices a year; saving a dairy industry job costs $685,000 per year; and saving a
job in the manufacturing of women’s handbags costs $263,000.
Source: The New York Times, June 26, 2006
a. What are the arguments for saving the jobs mentioned in this news clip? Explain
why these arguments are faulty.
The arguments for saving these jobs are (explicitly) the argument that protection saves jobs
and (implicitly) that protection allows us to compete with cheap foreign labour.
The fact these arguments are wrong can be demonstrated by comparing the cost of saving a
job to the wage paid on the job. The cost to U.S. consumers of saving a job massively
outweighs the benefit from a job to the worker, that is, the wage rate paid on the job. This
result demonstrates the conclusion that the cost of protection to the losers, U.S. consumers,
exceeds the gain to the winners, U.S. producers.
b. Is there any merit to saving these jobs?
There is merit to the workers whose jobs are saved and who might not receive any
government assistance if their jobs are not protected. There also is merit to the politicians
who can obtain a reward from lobbyists for the protection. But there is no merit to society as
a whole.

Economics in the News

27. After you have studied Economics in the News on pp. 168–169, answer the following
questions.
a. What is TPP?
The TPP is the Trans-Pacific Partnership, a trade agreement among 12 nations.
b. Who in Canada would benefit and who would lose from a successful TPP?
With a successful TPP, trade is freer. Canadian producers of exported goods gain because
they are sending more goods to foreign markets. Canadian consumers of goods that Canada
exports lose because the price of these goods in the Canadian market rise to the world price.
c. Illustrate your answer to part (b) with an appropriate graphical analysis
assuming that imports are not completely eliminated.
Figure 7.8a shows the effect in Canada of lowering the Canadian tariff on a good. Initially the
price in Canada is $90 a unit. Consumer surplus is equal to area A and producer surplus is

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 GLOBAL MARKETS IN ACTION 105

equal to area B + area F. When the

tariff is lowered, the price in Canada
becomes $70 a unit. Consumer
surplus increases and equals area A +
area B + area C. Producer surplus
decreases to area F. The
government’s tariff revenue equals
area E.
Figure 7.8b shows the effect in
Canada of Japan lowering a tariff.
Initially the price in Canada is $300 a
tonne. Consumer surplus is equal to
area A + area B and producer surplus
is equal to area E. When the tariff is
lowered so that the Japanese now
imports the good, the price in Canada
rises to $500 a tonne. Consumer
surplus decreases to equals area A.
Producer surplus increases to area B
+ area C + area E.
d. Who in Japan and other TPP
nations would benefit and who
would lose from a successful
TPP?
In other TPP nations and in Japan,
consumers of pork and other farm
products would benefit from a
successful TPP. In other TPP nations
and in Japan, producers of pork and
other farm products would lose from a
successful TPP. If Canada increases
its exports of pork and other farm
products, Canadian consumers of pork
and other farm products would lose
and Canadian producers of pork and
other farm products would gain from a
successful TPP.
e. Illustrate with an appropriate
graphical analysis who in Japan
would benefit and who would lose
from a successful TPP assuming
that all Japan's import quotas and
tariffs are completely eliminated.
Figure 7.9 shows the effect in Japan of eliminating Japan’s tariffs and import quotas. Before
the tariffs and import quotas are eliminated, the price in Japan is $700 a tonne. The
consumer surplus is equal to area A, the producer surplus is equal to area B + area C and
the government’s tariff revenue (or importers’ economic profit) is equal to area E. After the
tariffs and import quotas are removed, the price falls to $500 a tonne. Consumer surplus

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increases and equals area A + area B + area F + area E +

area G. Producer surplus decreases to area C. The
government’s tariff revenue (or importers’ economic profit)
disappears. Consumers benefit because their consumer
surplus increases; producers lose because their producer
surplus decreases; the government (or importers) lose
because their tariff revenue (or economic profit) is
eliminated.
28. E.U. Agrees to Trade Deal with South Korea
Italy has dropped its resistance to an E.U. trade
agreement with South Korea, which will wipe out $2
billion in annual duties on E.U. exports. Italians
argued that the agreement, which eliminates E.U.
duties on South Korean cars, would put undue
pressure on its own automakers.
Source: The Financial Times, September 16, 2010
a. What is a free trade agreement? What is its aim?
A free trade agreement is an agreement among nations that
they will not impose tariffs, quotas, or other protectionist policies on each other’s imports. The
aim of a free trade agreement is to increase total surplus in the trading countries.
b. Explain how a tariff on E.U. car imports changes E.U. production of cars,
purchases of cars, and imports of cars. Illustrate your answer with an
appropriate graphical analysis.
A tariff on E.U. car imports decreases E.U. imports. The price of cars in the European
Union rises. The quantity of cars bought in the European Union decreases and the
quantity produced increases.
c. Show on your graph the changes in consumer surplus and producer surplus
that result from free trade in cars.
With free trade in cars, the price of a car falls and the quantity bought increases. Consumer
surplus increases. The quantity of cars produced decreases. Producer surplus decreases.
d. Explain why Italian automakers opposed cuts in car import tariffs.
Italian automakers opposed cuts in the tariff because they knew that if the tariff was cut, the
price of cars in Italy would fall, which decreases producer surplus.

Copyright © 2016 Pearson Canada Inc.

Another random document with
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or throw yourself and your beauty and your accomplishments, and all
I’ve done for you, and all my hopes away, I solemnly declare to you
that I shall not hesitate to turn you penniless into the street. I swear I
will do it, and never own you again. You might go and die in the
poor-house, and I’d never raise a finger to save you from a pauper’s
funeral.”
He spoke very fast, his voice uneven and vibrating with passion,
his face livid at the mere idea of his schemes being foiled. He was
terribly in earnest; his very look made Madeline quail. She trembled
and turned pale, as she thought of poor Laurence.
“It’s not much I ask you to do for me, is it, Maddie, after all I’ve
done for you?” he continued in a softer key. “I have my ambitions,
like other men, and all my ambition is for you. Give up all thoughts of
your lover—that is, if you have one—and be an obedient daughter.
It’s not so much to do for me, after all.”
Was it not? Little he knew!
“Promise me one thing, Madeline,” he continued once more,
breathing in hard gasps, and seizing her ice-cold hand in his hot dry
grip.
“What is that, father?” she asked in a whisper.
“That you will never marry without my consent, and never listen to
a commoner. Will you promise me this? Can you promise this?”
“Yes, father, I can,” she answered, steadily looking him full in the
eyes, with a countenance as white as marble.
“On your honour, Madeline?”
“On my honour!” she echoed in a curious, mechanical voice.
“Very well, then,” inwardly both relieved and delighted; “that is
what I call a model daughter. You shall have a prize. I will get you
some diamonds to-morrow that will open people’s eyes; no trumpery
little half-set, but a necklet, tiara, and brooches. I saw a parure to-
day, old family jewels. Hard up—selling off; one goes up, another
comes down, like a see-saw. It’s our turn now! You shall wear stones
that will make people blink—diamonds that will be the talk of London.
If folks say they are too handsome for an unmarried girl, that is our
affair, and a coronet will mend that. You have a head that will carry
one well. Your mother’s blue blood shows. You shall pick and
choose, too. Lord Anthony may think——”
“Lord Anthony Foster and Sir Felix Gibbs,” said a sonorous voice.
And what Lord Anthony might think was never divulged to
Madeline; Mr. West, with great presence of mind, springing with one
supreme mental leap from family matters to social courtesies.
The dinner was perfect, served at a round table. The floral
decorations were exquisite; attendance, menu, wines were
everything that could be desired. The gentlemen talked a good deal
—talked of the turf, the prospect of the moors, of the latest failure in
the city, and the latest play, and perhaps did not notice how very little
the young hostess contributed to the conversation. She was absent
in mind, if present in the body; but she smiled, and looked pretty, and
that was sufficient. She was beholding with her mental eye a very
different ménage, far beyond the silver centre-pieces, pines, maiden-
hair ferns and orchids, far beyond the powdered footmen, with their
dainty dishes and French entrées.
We know what she saw. A cosy farm parlour, with red-tiled floor, a
round table spread with a clean coarse cloth, decorated by a blue
mug, filled with mignonette and sweet pea, black-handled knives and
forks, willow-pattern delf plates, a young man eating his frugal dinner
alone, and opposite to him an empty chair—her chair. She saw in
another room a curious old wooden cradle, with a pointed half-roof,
which had rocked many a Holt in its day. Inside it lay a child that was
not a Holt, a child of a different type, a child with black lashes, and a
feeding-bottle in its vicinity. (Now, Mrs. Holt’s progeny had never
been brought up by hand.) Her baby! Oh, if papa were only to know!
she thought, and the idea pierced her heart like a knife, as she
looked across at him, where he sat smiling, conversational, and
unsuspicious. He would turn her out now this very instant into the
square, were he to catch a glimpse of those two living pictures. He
was unusually animated on the subject of some shooting he had
heard of, and he had two attentive and, shall we confess it,
personally interested listeners—listeners who had rosy visions of
shooting the grouse on those very moors, as Mr. West’s guests.
So, for awhile, Madeline was left to her own thoughts, and they
travelled back to her earliest married days, the pleasant little sitting-
room on the first floor at No. 2, the bright fires, bright flowers, new
music, and cosy dinners (the mutton-chop period), when all her
world was bounded by Laurence. Was it not still the case? Alas, no!
The bald-headed gentleman opposite, who was haranguing about
“drives and bags,” held a bond on her happiness. He had to be
studied, obeyed, and—deceived! Would she be able to play her
part? Would she break down? When he looked at her, as he had
done that evening, her heart failed her. She felt almost compelled to
sink at his feet and tell him all. It was well she had restrained herself.
She resolved to save for a rainy day some of the money he was to
give her on the morrow. Yes, the clouds were beginning to gather,
even now.
Oh, what a wicked wretch she felt at times! But why had cruel fate
pushed her into such a corner? Why was her father so worldly and
ambitious? Why had she failed to put forward Laurence’s plea, his
own long absence and silence, and thus excuse herself once for all?
Easy to say this now, when that desperate moment was over—it is
always so easy to say these things afterwards! She had given her
father a solemn promise (and oh, what a hollow promise it was!), and
she was to receive her reward in diamonds of the first water—
diamonds that would blind the ordinary and unaccustomed eye!
Presently she rose, and made her way slowly to her great state
drawing-rooms, and as she sipped her coffee she thought of
Laurence, and wondered what he was doing, and when she dared to
see him, to write? Poor Laurence! how seedy his clothes were; and
how much his long illness had altered his looks. With his hollow
cheeks and cropped head (his head had been shaved), none of his
former friends would recognize him. Then her thoughts wandered to
her diamonds. She stood up and surveyed herself in the long mirror,
and smiled back slightly at her own tall, graceful reflection.
Diamonds always looked well in dark hair. She was but little more
than nineteen, and had the natural feminine instinct for adornment.
She smiled still more radiantly; and what do we hear her saying in a
whisper, and with a rapid stealthy glance round the room? It is this: “I
wonder how you will look in a diamond tiara, Mrs. Wynne?”

END OF VOL. I.

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