Video transcript
Work It Out, Chapter 11, Question 5
(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)
(Speaker)
Now, in addition to the assumptions made in (d), consider the effect of an increase in high-technology investment in Canada due to NAFTA, allowing Canadian firms to develop better technology. As a result, three years after the initiation of NAFTA, Canadian firms can begin to sell their products to the United States for 40 dollars. What happens to the U.S. trade pattern three years after NAFTA? Has either trade creation or trade diversion occurred because of NAFTA? Explain.
(Description)
The table from the Question 1 is shown. The only difference is that a row labeled, From Canada 3 yrs after NAFTA, is put between the third and the fourth rows of the table. It has the following data: 40 dollars, 40.00 dollars, 40.00 dollars.
(Speaker)
With better technology, marginal cost of production significantly reduces for Canada so that its supply curve shifts out. Now Canada will fully replace Asia as the supplier of semiconductors to the United States. The United States will lose its tariff revenue from Asia, but it experiences a net gain in consumer surplus. Canadian producer surplus rises because it is exporting more. This case combines elements of trade diversion (Canada replaces Asia) and trade creation (Canada is exporting more to the United States), and the extent of trade creation for Canada exceeds the amount of trade diversion.
(Description)
Two coordinate planes with the horizontal x-axis and the vertical y-axis are drawn.
The horizontal axis is labeled as Import quantity, with points, Q subscript 2, Q subscript 3, and Q subscript 1, indicated from left to right. The vertical axis is labeled as Price, with points, P subscript Asia, and P subscript Asia plus t, indicated from bottom to top.
Two straight lines parallel to the horizontal axis extend from points, P subscript Asia, and P subscript Asia plus t, on the vertical axis. They are labeled S subscript Asia, and S subscript Asia plus t, respectively.
A straight line sloping downward from the left upper corner to the right lower corner of the plot is drawn. It is labeled M subscript US.
Two straight lines sloping upwards from the left lower corner to the right upper corner of the plot are drawn. They are labeled S subscript Mex, and S subscript Mex plus t. They have the same slope, but line, S subscript Mex is below line, S subscript Mex plus t.
Another straight line sloping upwards from the lower area to the right upper corner of the plot is drawn. It is labeled S prime subscript Mex.
Point, A, is the intersection between lines, S subscript Asia plus T, and M subscript US. Its coordinates are, Q subscript 1 and P subscript Asia plus t.
Point, B, is the intersection between lines, S subscript Asia plus T, and S subscript Mex plus t. Its coordinates are, Q subscript 2 and P subscript Asia plus t.
Point, C, is the intersection between lines, P subscript Asia plus T, and S subscript Mex. Its coordinates are, Q subscript 3 and P subscript Asia plus t.
Point, D, is the intersection between lines, M subscript US, and S prime subscript Mex.
The area labeled a is represented by a rectangle with the following vertices.
The first vertex is a point with coordinates, 0 and P subscript Asia.
The second vertex is a point with coordinates, 0 and P subscript Asia plus t.
The third vertex is point B.
The fourth vertex is a point with coordinates, Q subscript 2 and P subscript Asia.
The area labeled b is represented by a triangle with the following vertices.
The first vertex is point B.
The second vertex is point C.
The third vertex is a point with coordinates, Q subscript 2 and P subscript Asia.
The area labeled с is represented by a triangle with the following vertices.
The first vertex is a point with coordinates, Q subscript 2 and P subscript Asia.
The second vertex is point C.
The third vertex is a point with coordinates, Q subscript 3 and P subscript Asia.
The area labeled d is represented by a rectangle with the following vertices.
The first vertex is point C.
The second vertex is point A.
The third vertex is a point with coordinates, Q subscript 1 and P subscript Asia.
The fourth vertex is a point with coordinates, Q subscript 3 and P subscript Asia.
The area labeled e is represented by a triangle with the following vertices.
The first vertex is point A.
the second vertex is point D.
The third vertex is a point with coordinates, Q subscript 1 and P subscript Asia.
The area consisting of areas, a, b, and c, is hashed.
The area, e, is dashed.
(Speaker)
Figure 11-3 illustrates the net benefit for the United States. The area of tariff revenue a plus b plus c is lost to the government but becomes consumer surplus. Area d plus e represents the net gain in consumer surplus for the United States from the trade diversion.