Free Trade | A-Level Economics Model Paragraph

One impact of trade agreements is lower prices. Trade agreements mean that countries can trade freely without protectionist measures such as tariffs. A tariff is a tax on imports and the diagram shows the effects of removing tariffs on the economy.

The diagram shows a regular demand and supply curve for goods and services in the domestic economy. World supply is perfectly elastic as there are infinite sellers around the world relatively to the UK. Removing tariffs causes world supply to increase (as shown by a shift from Sworld+tariff to Sworld. This means that imports become more competitive. This means that imports increase from q1q2 to q3q4. Additionally, domestically produced goods and services become less competitive relative to imports. This means that domestic consumption decreases from 0q1 to 0q3. There is an expansion in demand and a contraction in supply, and overall a fall in prices from p1 to p2. This means that domestically, firms are able to benefit from lower costs of production for factors of production that they import and consumers are also able to benefit from lower prices.

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