I have organized this page so it would be easier for me to study for the IB exam. Also, by trying drawing all the diagrams for Section 4, I had more practice for the IB exam and the Internal Assessments.
Economy Without Trade
= This diagram illustrates the domestic economy without trade.
Free Trade Diagram
= Before trade, Qe product is produced domestically at a price of P. When free trade takes place, Q1Q2 of corn is produced domestically.
Tariff Diagram
= The imposition of tariff upon the product means that the price will rise from Pw to Pw + tariff. Imports will fall from Q1Q2 to Q3Q4 and domestic production will increase from Q1 to Q2.
Subsidy Diagram
= When the government gives a subsidy to a domestic producers, the domestic supply curve shifts downwards from Sdomestic to Sdomestic + subsidy. The price to consumers remains the same, but imports fall from Q1Q2 to Q3Q2 and domestic production increases from Q1 to Q3.
Quota Diagram
= Quota is a limit on the amount that can be imported.Results in loss to domestic consumers, gain for domestic producers and a windfall profit to some overseas suppliers. No direct financial cost to government but will result in hostility from trading partners.
Floating currency Diagram
= The exchange rate of the pound against the Euro is being determined solely by the demand for the pound and the supply of it.
Increase in the supply of a Pound
= The supply of the pound has increased from S1 to S2. This may have been caused by an increase in foreign interest rates, increased demand for foreign products, speculation that the pound will decrease in value, or a more favorable investment climate in foreign countries. In all cases, UK citizens will want more foreign currency, thus increasing the supply of Pound s on the foreign exchange market.
Decrease in the supply of a Pound
= The supply of the pound has decreased from S2 to S1. This may have been caused by an decrease in foreign interest rates, increased demand for foreign products.
Increase in the demand for Pound
= The demand for the Pound had increased from D1 to D2. This may have been caused by an increase in UK interest rates, increased demand for UK products, speculation that the Pound will increase in value, or a more favorable investment climate in the UK. In all cases, EU citizen will want more Pounds, thus increasing the demand for the Pound on the foreign exchange market.
Decrease in the demand for Pound
= The demand for the Pound had decreased from D2 to D1. This may have been caused by an decrease in UK interest rates, decreased demand for UK products, speculation that the Pound will decrease in value, or a more favorable investment climate in the UK.
