1. Assume that there are only two countries in the world, USA and India. Both countries

produce and consume surfboards. The pre-trade price of surfboards in USA is lower than

the pre-trade price of surfboards in India. Very high trade barriers (tariffs) exist between

the two countries that prevent any trade from occurring. The two countries are considering

signing a free trade agreement that will remove all tariffs and open trade in surfboards

between USA and India.

a. USA has very low prices for surfboards. what will happen with prices for

surfboards, production of surfboards and consumption of surfboards in USA after the

opening to trade. Will USA be an importer or exporter of surfboards? Who in USA will win if

a free trade agreement is signed, and who will lose. Explain whether or not USA as a whole

will be made better or worse off through the signing of the free trade agreement. draw a graph to help illustrate the situation.

b. India has very high prices for surfboards. Please explain what will happen with prices for

surfboards, production of surfboards and consumption of surfboards in India after the

opening to trade. Will India be an importer or exporter of surfboards? Who in India will win

if a free trade agreement is signed, and who will lose. Explain whether or not India as a

whole will be made better or worse off through the signing of the free trade agreement. draw a graph to help illustrate the situation.

c. Now assume that labour is the factor that is most intensely used in the manufacture of

surfboards. Using HO theory, what can you predict about the factor abundance of each

country?

d. Now assume that in the USA consumers welfare is valued more than producers welfare (a

deviation from the one dollar one vote metric) and in India producers welfare is valued

more than consumers welfare, what will that mean for the analysis of whether or not trade

in surfboards is welfare enhancing?

d. Now assume that after a decade of free trade between India and USA that they decide to

stop trading altogether. What will happen to prices, consumption, and production of

surfboards in each country? Who will win and who will lose if each country ceases trading?