Suppose that the United States, China, and Mexico are the only three countries in the world. Further suppose that the United States initially has a $6 non-discriminatory import tariff on shirts, then subsequently forms a free trade area with Mexico.

The Chinese cost of producing shirts is $9 and the Mexican cost is $12.

In the case of a non-discriminatory tariff, the United States imports 1,600 shirts.

After formation of the free trade area, the U.S. imports 2,200 shirts.

What is the dollar value of trade creation?

Answer rating: 100% (QA)

Trade creation in this scenario would refer to the increase in trade brought about by the formation ... View the full answer