Tarriffs: Suppose the market price for solar panels in the U.S. will be $500 per panel in the absence of any trade in solar panels. The price of solar panels in the world market is $295 per panel. a) What will be the price of solar panels in the U.S. if the U.S. has free trade in solar panels? Diagrammatically show the gains from trade in solar panels. (Change in welfare as a result of free trade in solar panels compared to the situation of no trade. Show how the different components of welfare such as consumer surplus and producer surplus change.) b) Now suppose the Trump administration imposes a quota. That is, it says that it will allow the import of only 10 million panels a year (With free trade the imports would have been more than 10 million). Will the price of solar panels rise or fall in the US? Who will gain from the quota? Who will lose? Diagrammatically show the welfare impact of the quota compared to the free trade situation. (Again show the change in welfare in terms of consumer surplus, producer surplus, government revenue etc. You can assume that the government auctions quota licenses.)

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Comparative Advantage and Absolute Advantage Analysis

The theory of absolute advantage was given by Adam Smith in the year 1776.