International Economics Chapter 11 Problem Set Suppose the United States could import footwear from Thailand at the price of $20 per pair or from Mexico at $24 per pair. The domestic price of footwear...

Solution to International Economics Chapter 11 Problem Set
Some basic definitions:
NAFTA: North American Free Trade Agreement is an agreement between Canada, Mexico and the
United States, creating a trilateral trade bloc in North America. It implies removal of trade barriers (e.g.
tariffs) between the member countries.
Tariff: A tariff is a tax imposed on imported goods and services. Tariffs are used to restrict trade, as they
increase the price of imported goods and services, making them more expensive to consumers.
Price at which US can import footwear from Thailand: $20 per pair
Price at which US can import footwear from Mexico: $24 per pair
Domestic Price of footwear in the US: $35 per pair
a. The situation prior to NAFTA
Price of importing from Thailand (inclusive of tariff): $20 + 50%($20) = $20 + $10 =$30
Price of importing from Mexico (inclusive of tariff): $24 + 50%($24) = $24 + $12 = $36
Prior to NAFTA, the US will import footwear and it will import from Thailand because the price
of a pair imported from Thailand is lower than the domestic price as well as the price of
importing from Mexico. According to...