ECONOMICS QUESTION - please help!!!?

Question

Read the article below, and answer the questions that follow.

China, New Zealand Sign Free Trade Agreement on April 7

(c) 2008 SinoCast LLC. All Rights Reserved.

China and New Zealand are scheduled to ink a free trade agreement (FTA) in Beijing on April 7, 2008, the first one signed between China and a developed country.

After the implementation of the FTA, New Zealand is expected to increase its foreign trade by USD 225 million and save USD 120 million in tariff expenditure. Moreover, exporters in the Australian nation are expected to gradually profit from the agreement since most of the tariff payment on the agricultural products will be cancelled until 2020.

On the other hand, companies in China will enjoy preferential policies when exporting products to New Zealand or making investment there.

In addition, the FTA will reduce the current trade surplus between China and New Zealand, estimated experts in New Zealand. New Zealand's export to China is predicted to grow 39% in the coming 20 years while export from China to New Zealand will rise 11%.

(a)(i) On a supply and demand diagram, show the New Zealand market for textiles,

which imports from China. (Be sure to show all areas of surplus). (4 marks)

(ii) On your diagram, show the effect of a tariff being imposed on textiles from China, which results in NZ still being an importer of textiles. (Be sure to show the effect on surplus of the tariff being imposed).

(iii) Fully explain the impact on the New Zealand textile market of the tariff being removed, as part of the free trade agreement with China (Refer to your diagram as part of your answer).

ALL I NEED TO KNOW IS THE ANSWER TO QUESTION 3!!!! Please explain in detail. Many thanks :)

Answer 1

(a) (i)

On domestic NZ market there will be increase of textile supply (rightward shift of supply curve) due to reduction in import tariffs from China, it will lead to fall of deadweight loss (increase in total surplus), reduction of domestic textile prices and increase in quantity traded.

(b) (ii)

The effect is opposite to one described in (a) (i), tariff will lead to higher deadweight loss (lower total surplus), higher NZ domestic price on textile and lower traded quantity - though there will be some higher tariff revenue for government.

(c) (iii)

On domestic NZ market there will be increase of textile supply (rightward shift of supply curve) due to reduction in import tariffs from China, it will lead to fall of deadweight loss (increase in total surplus), reduction of domestic textile prices and increase in quantity traded.

government will loose tariff revenues.