Question

In: Economics

BRIEFLY explain your understanding of the effects of tariffs of goods from Mexico on Aggregate Demand and supply.

Mexico is the third largest US trading partner. (Source: US Census: U.S. Trade in Goods by Country (Links to an external site.) (Links to an external site.))

China – $636 billion
Canada – $582.4 billion
Mexico – $557 billion
Japan – $204.2 billion
Germany – $171.2 billion
South Korea – $119.4 billion
United Kingdom – $109.4 billion
France – $82.5 billion
India – $74.3 billion
Italy – $68.3 billion
Taiwan – $68.2 billion
Brazil – $66.5 billion
Netherlands – $60 billion
Ireland – $59.6 billion
Switzerland – $57.7 billion

There has been much talk recently about tariffs added on goods traded from Mexico to the US.

BRIEFLY explain your understanding of the effects of tariffs of goods from Mexico on Aggregate Demand and supply.

Solutions

Expert Solution

Answer - As a result of the tariffs imposed on the goods coming from mexico into US , the imports will now be more expensive. As a result the value of Net Export will rise. This will lead to rise in AD . Hence AD curve will shift right.

But , for producers , they will have to import the raw material and other inputs at greater prices. Their cost of production will rise. Hence AS will decrease and AS curve will shift to left.

Hence AD will shift right and AS will shift left. This will lead to rise in price level in the economy but there will be no impact upon real GDP. This can be shown as follows -


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