E.U. Agrees to Trade Deal with South Korea Italy has dropped...

E.U. Agrees to Trade Deal with South Korea Italy has dropped its resistance to a 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. a. What is a free trade agreement? What is its aim? 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. c. Show on your graph the changes in consumer surplus and producer surplus that result from free trade in cars. d. Explain why Italian automakers opposed cuts in car import tariffs.

E.U. Agrees to Trade Deal with South Korea Italy has dropped its resistance to a 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.
a. What is a free trade agreement? What is its aim?
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.
c. Show on your graph the changes in consumer surplus and producer surplus that result from free trade in cars.
d. Explain why Italian automakers opposed cuts in car import tariffs.

Key Concepts

Producer Surplus

Producer surplus represents the benefit producers receive when they sell a good at a market price higher than the minimum price at which they are willing to produce. Graphically, it is the area between the supply curve and the market price. Adjustments in tariffs can affect producer surplus by changing the competitive dynamics within the domestic market, potentially raising domestic prices and protecting local producers.

Protectionism

Protectionism involves measures such as tariffs, quotas, and subsidies that a country uses to shield its domestic industries from foreign competition. These policies are designed to preserve jobs and maintain domestic production, but they can also lead to higher prices for consumers and inefficiencies in the market. Opposition to tariff cuts by domestic industries, like the automotive sector, is often driven by concerns over increased competition from foreign producers.

Consumer Surplus

Consumer surplus is the economic benefit that consumers receive when they pay a price lower than what they are willing to pay for a good. In graphical terms, it is represented by the area between the demand curve and the market price. Changes in trade policies, such as tariff cuts, can alter consumer surplus by lowering prices and increasing the quantity of goods available to consumers.

Free Trade Agreement

A free trade agreement is an arrangement between two or more countries to reduce or eliminate trade barriers such as tariffs, import quotas, and preferences on goods and services traded between them. Its aim is to promote economic integration by increasing market access, fostering competition, reducing costs, and ultimately stimulating economic growth among the member countries.

Tariff

A tariff is a tax imposed on imported goods, which raises the price of these goods relative to domestically produced alternatives. This tool is often used to protect domestic industries by making imported products less competitive, thereby influencing domestic production, consumption, and import patterns.

Supply and Demand Analysis

Supply and demand analysis is a fundamental economic framework used to understand how markets operate. When tariffs are imposed or removed, they shift the supply and/or demand curves in the domestic market. This analysis helps illustrate changes in equilibrium price and quantity, showing how domestic production and consumption adjust in response to trade policy changes.

Transcript

00:02 Hello students, so today we will discuss about free trade agreement and if another country is not agreeing to trade freely and is imposing tariffs on the imports that were being agreed by them, so how it will affect the consumer surplus and the producer surplus.

00:20 So, let's start.

00:21 So, free trade agreement.

00:23 What do we understand by the term free trade agreement? a free trade agreement is a mutually accepted, it is a mutual consent or an aggregate.

00:32 Between the two countries for the purpose of trade in which there would be no distortions or the restrictions either from the buyer's perspective or from the seller's perspective.

00:44 So, this implies that there would be a free flow of goods and services from one run country to another without any involvement of international trade restrictions like tariffs, no quotas, no subsidies and no voluntary restraints, duties and etc.

01:00 So, what would be the aim of free trade agreement? the aim of free trade agreement would be to achieve efficiency in production and also by maximizing their gains from the trade.

01:20 Efficiency in production along with maximizing their gains in trade.

01:25 Maximization of profits or the gains from free trade.

01:32 So, let's understand this with the help of an example.

01:53 Let's say country u is importing cars to country s.

02:04 Country u is exporting cars to country s.

02:10 That means country s is the importing country.

02:14 So now let's take an hypothetical example and understand this with the help of graph.

02:25 So, this is the graph.

02:26 Here the prices are given on y -axis...