Economics Sample Paper on North America Free Trade Policy

 North America Free Trade Policy

1) According to the Krugman, trade barriers against Mexico were relatively low at the time of his writing. He stated that, average tariff rate levied by the United States on imported manufactured commodities from Mexico had an average of four percent. The rate is relatively low hence signing of NAFTA appeared to be more of a foreign strategy contrary to creation of economic benefits for the two countries. 

2) According to Krugman, opponents of NAFTA believe that free trade is a foreign strategy but not an economic issue that would not benefit U.S economy after signing the free trade agreement. The agreement exposes America Industrial economy to forces that could transform it into service economy.   

3) Besides the creation and losses of jobs resulting from free trade, the effects of losses turn to be minimal at a rate of 0.5% loss. This is because, other forces and drivers of economy like Federal Reserve’s Open market Committee which makes decisions pertaining to the desirable interest rate would offset the net effect by adjusting interests rates. These drivers have great effects on the determination of unemployment of country’s citizens compared to any trade policy. Any loss of job would therefore be offset with ease by Federal Reserve policy through change in interest rates equivalent to a proportion of a percentage loss.

4) The right question will be; Will Mexican factories that emerge under NAFTA cause a lot of harm compared to the factories in which Mexican employees would instead been employed? This is the right question because NAFTA would not make people change their jobs from US to Mexico or from Mexico to United States.

5) NAFTA effects on environment could be positive resulting from the fact that, US highlight environmental issues as being paramount to its economy; this would pressurize Mexico to put in force and implement stringent environmental laws to match those of United States hence improving on cleanliness of Mexican factories.

6) The three sources of gains from trade offered by NAFTA are similar to those gains from international trade. According to Krugman, each nation would enhance its production in industries that it is comparatively productive improving on effectiveness of entire Northern America economy. Secondly, increased markets resulting from free trade would give chance for both countries to exploit and benefit from economies of scale. Finally, increased market would bring about healthy competition lowering the level of ineffectiveness, which in most cases result from monopoly powers.

7) The predicted gains to the United States are generally small. This is because, US and Mexico had prior to NAFTA moved closer to free trade and the remaining trade barriers imposed to Mexico by U.S were very minimal to cause major impact on United States’ economy. Additionally, economy of Mexico is relatively small compared with US with a GDP of less than 4% that of US. These facts indicate that Mexico would neither be a major supplier or market to the United Sates.  

8). Krugman does not expect lower wage rates for the U.S unskilled workers. This is supported by the fact that, there has no practical evidence, which had been used to proof and support this theory and also, wage rate of many nations are not determined by trade policies, but monetary policy.

9) According to Krugman, the most benefit accruing to the United State from NAFTA is maintaining friendly neighborhood with Mexico and help the economy of Mexican government grow. Also, reallocating Mexican industries, this would minimize congestion in the City and control pollution.