Refer to the Diagram Below to Answer This Question

question 92

Essay

Refer to the diagram below to answer this question. Suppose the Edgeworth box diagram above pertains to trade between Mexico and the U.S. Before the ratification of the North American Free Trade Agreement (NAFTA), the consumption of computer chips and textiles in both countries is given by point A. At point A, what is true regarding the relative price of computer chips in the U.S. versus Mexico? If the ratification of NAFTA allows trade to bring about the efficient equilibrium, which point in the diagram indicates the level of consumption by each country? At the new equilibrium, what has happened to the price of chips in the U.S.? How do we know both countries are better off by free trade?

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