Suppose that Canada has domestic firms that could supply its entire market for radios at a price of $50, while U.S.firms could supply radios at $40 and Mexico at $30.Suppose that Canada initially has a 50 percent tariff on imports of radios and then forms a free trade area with Mexico.As a result, Canada realizes

Question

Quizplus · Accepted Answer

With the free trade area with Mexico, Canada can benefit from trade creation. This means that they can now import radios from Mexico at a lower cost ($30) compared to before ($40 domestic or $50 from U.S.). There will be no trade diversion as they are not replacing imports from U.S. with imports from Mexico. Overall welfare gains can be expected as consumers in Canada can purchase radios at a lower price and therefore have higher purchasing power.

Suppose That Canada Has Domestic Firms That Could Supply Its