Table depicts the supply and demand schedules of gloves for Portugal, a small nation that is unable to affect the world price. On graph paper, draw the supply and demand schedules for gloves in Portugal.

a. Assume that Germany and France can supply gloves to Portugal at a price of $2 and $3, respectively. With free trade, which nation exports gloves to Portugal? How many gloves does Portugal produce, consume, and import?

b. Suppose Portugal levies a 100-percent nondiscriminatory tariff on its glove imports. Which nation exports gloves to Portugal? How many gloves will Portugal produce, consume, and import?

c. Suppose Portugal forms a customs union with France. Determine the trade-creation effect and the trade-diversion effect of the customs union. What is the customs union’s overall effect on the welfare of Portugal?

d. Suppose instead that Portugal forms a customs union with Germany. Is this a trade-diverting or trade-creating customs union? By how much does the customs union increase or decrease the welfare ofPortugal?

Transcribed Image Text:

SUPPLY AND DEMAND FOR GLOVES: PORTUGAL Quantity Supplied Quantity Demanded Price (S) 18 16 4 12 10 4 10 12 14 16 18 9