Paper 3 examination question on trade barriers (exiting syllabus)
This is a continuation of the previous lesson and contains a paper three type question on the costs and benefits of being part of a trading bloc. This exercise can be completed in 45 minutes. While paper three type questions are only part of the higher level syllabus, I will also give paper three exercises to my standard level students to complete, as it provides good practise for all economics students.
Maximum mark for this question 25
1. The following is a middle income country which has joined a free trade association. They produce bread domestically which they make from a combination of domestically produced and imported corn. Prior to joining the FTA the government imposed a tariff on corn imports but after joining the organisation they were forced to remove these. This reduced the price of corn in the country to $ 5 per Kg.
Define the following terms:
(a) i. Preferential trade area (PTA) [1 mark]
ii. Monetary union [1 mark]
iii. Common market [1 mark]
(b) i. Calculate the total revenue spent on corn by consumers prior to joining the FTA? [2 marks]
ii. Calculate the amount spent by consumers on corn after joining the FTA? [2 marks]
iii. Prior to the removal of the tariff what was the level of tax revenue generated by the import tax? [2 marks]
iv. Calculate the change in revenue gained by domestic producers after the removal of the tariff. [2 marks]
v. Calculate the change in revenue gained by imported producers after the removal of the tariff. [2 marks]
vi. Which area represents the gain in consumer surplus after the tariff was removed? [2 marks]
vii. Which area represents the deadweight loss resulting from the imposition of the original tariff? [2 marks]
(c) Explain the impact of membership of the free trade area on the following stakeholders: [4marks]
- domestic producers
- the government.
(e) Explain the difference between trade diversion and trade creation. [4 marks]
The paper three type questions above can be accessed as a PDF worksheet at: P3 questions
The P3 markscheme with responses is available at: Mark scheme