Benefits Of A Free Trade Agreement With Atollia For Industria’s Economy

Problem A – Survey results for Atollia

1. Problem A:
2. The annual average demand of energy bars per person   is regressed against the variables average income per person, tariff rate and Number of stores where energy bars are offered for investigating the demand for energy bars in Atollia in more detail. Since all variables have different scales of measurement, all are converted to logarithms and then regressed with each other. In the linear regression model, dependent variable is logarithm of annual average demand of energy bars per person .The independent variables are the logarithms of the variables average income per person, tariff rate and Number of stores where energy bars are offered. The results of the regression are given below.

Table 1:Regression Results

The results show that the average income, tariff rate and the number of stores where energy bars are offered significantly influence the annual average demand of energy bars per person. The regression model is statistically significant as shown by the value for F statistics. Among these variables, a one unit rise in the logarithm of the   number of stores where energy bars are offered results of   0.92 units rise in the logarithm of annual average demand of energy bars per person. In other words, a one unit rise in the number of stores where energy bars are offered results in a significant rise of   8.32 units in the annual average demand of energy bars per person. This shows that offering the products at another store will result in more than proportionate rise in the annual average demand of energy bars per person.  The results also show that one unit rise in the average income results in a significant rise of 4.58 units rise and one unit rise in the tariff rate results in   a significant decline of 2.7 units   in the annual average demand of energy bars per person.

I.Problem B:

1.  Based on the regression results estimated it is seen thatone unit rise in the tariff rate results in   a significant decline of 2.7 units   in the annual average demand of energy bars per person. Hence, increasing tariff rates will lead to the decline in the demand for energy bars, once the effects of income and number of stores offered are controlled. The reason is that higher tariffs is   a tax on the good imported which leads to the rise in the price for consumers, though it may be beneficial to the domestic producers ( Arnold, 2008  ). Thus,   a higher tariffs on the energy bars result in higher prices for the consumers over time , leading to a decline in the demand for the product to the consumers(Harrisson,2009  ) .  Through a free trade agreement, the tariff rates will be eliminated that can reduce the prices and increase the demand for the product. Thus, a free trade agreement with Atolia will increase the demand for the energy bars. It is therefore advisable to reduce the tariff rates or have a free trade agreement with Atolia for increasing the demand for energy bars.

In the above figure, it is shown that by imposing a tariff the domestic producers benefit as is shown by the area denoted as producer surplus. The reason is that they can charge a higher price for the product, which, in turn increase the revenue of the sellers and the tax revenue for the government (Pindyck and Rubinfield, 2012). At the same time, consumers have to pay a price greater than the world price thus increasing the prices which the consumers have to pay for buying the imported good. Over time, there will be a decline in the consumer demand for the imported goods, which is the demand for energy bars in this case. There will be a deadweight loss when the consumers buy the imported product since the consumer surplus which they were enjoying is declined (Varian, 2010).   The overall surplus to the economy will decline through imposing the tariffs by the deadweight loss from imposing the tariff. The deadweight loss is the reduction in consumer surplus which is not able to be compensated by the gain in   the producer surplus. Thus, the free trade agreement by eliminating the tariffs can increase the consumer surplus which in turn increases the surplus to the economy.

1. Problem A
2. Assuming that free trade agreement with Atollia would indeed increase the demand for the energy bars,   the aggregate demand in the country will be increased. Thus the production in the country will be increased since more demand for energy bars will necessitate a rise in its production based on the comparative advantage theory (Mankiw, 2014). This in turn boosts the creation of jobs in the country, since the rise in production leads to the generation of more jobs (Mc Eachem, 2017).  This means more demand for labour in the industry, through the expansion effect. This is translated into rise in   real income and higher wages for the workers. The reason is that rise in product demand leads to rise in the product price, resulting in   revenue and profit rise, until the employees demand for  wage rise given the rise in production. This necessitates the company to increase the wages.  Thus free trade agreement is beneficial for the economy through increasing the labour demand and the wages. Hence, it can be concluded that the free trade agreement with Atollia is good for the   Schmeckt Gut’s labour demand and wage development.
3. Assuming that the development of Schmeckt Gut’s labour demand is a good indicator for the industria as a whole, the effect on industria’s economy is given below.   The rise in the demand for the product leads to rise in labour demand and higher wages   through increased production created by the new demand.

The GDP of the industry is increased through the rise in the labour demand and rise in the wages, which were explained earlier. The economy as a whole will be affected positively due to the rise in the industria’s GDP .It can also cause high inflation due to the increased income of the population.

References

Arnold R, A (2008): Microeconomics, Thomson/South-Western, Mason, Ohio.

Harrisson A (2009): Business Environment in a Global Context, Oxford University Press,Oxford.

Mankiw G (2014): Principles of Microeconomics, South-Western, Australia.

Mc Eachem W A (2017): Economics: a contemporary introduction, Cengage Learning, Australia

Pindyck R   and D Rubinfield (2012): Microeconomics, Pearson Publications, United States.

Varian H R (2010): Intermediate Microeconomics, Norton Publishing, United States.