3. Assume the US wants to open up trade with Sweden in the hot tub market....

3. Assume the US wants to open up trade with Sweden in the hot tub market. Assume that the price in Sweden for hot tubs is higher than it is in the US. Will the US be an importer or an exporter of hot tubs? Explain, in economic terms, why you answered how you did. Draw a properly labeled graph to support your answer.

Assume the US wants to open up trade with Sweden in the hot tub market. Assume that the price in Sweden for hot tubs is lower than it is in the US. Will the US be an importer or an exporter of hot tubs? Explain, in economic terms, why you answered how you did. Draw a properly labeled graph to support your answer.

Solutions

Expert Solution

3. Assuming US is a large country which can affect world prices. Therefore if domestic prices of hot tubs in Sweden is greater than world price/ US price than US will export tubs to Sweden and Sweden will find it cheaper to procure tubs from US than produce domestically.

This is shown in diagram below. The domestic production is till point B. The rest in pink color area is imported to meet demand at till C.

Further, if price in Sweden is lower than world prices then it cannot affect world prices being a small country. Therefore it will export at higher world markets and US will find it cheaper to source hot tubs from Sweden.

In diagram below, domestic production is till point C. Domestic demand is met till point B. The rest green color area are exports to world/ US.

Rahul Sunny answered 2 years ago

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