Video tutorial that illustrates how to plot, analyze and evaluate the possible consequences of Trump tariffs for an exporting country (Canada) and the value of the US and Canadian dollars in FOREX

Bank of Canada: /"Tariffs and exchange rates: evidence from Twitter/":
https://www.bankofcanada.ca/2021/07/staff-working-paper-2021-36/

Note:
Analysis of the IB Economics exam (at 4:05)
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analysis
* Chart A: Impact of US import tariffs per unit on the Canadian economy
* The x-axis measures the amount
* The Y-axis measures the price
* Sd1 (supply law) = domestic supply
* Dd1 (law of demand) = domestic demand

* Sd1=Dd1, ensures a balance between domestic price and quantity

* Canada practices free trade, North American Free Trade Agreement (NAFTA) with Mexico, USA, accepts the world market price (Pw)

* Pw is higher than the domestic equilibrium price, so Canadian firms (due to their higher productivity and comparative advantage) will increase Qs to Q4 (point A) (this will also lead to increased employment in these Canadian industries).

* Pw is greater than the domestic equilibrium price, so Canadian consumers will lower Qd to Q1 (point C).
* In the fourth quarter, MB = MC, global allocation efficiency

* Qs is greater than Qd, so Canada will export (to the US and other countries) a quantity of Q4 – Q1

* The Trump administration decides to impose a per unit tariff to protect domestic US industry from foreign competition.
* US trade protection can also lead to a shift in spending. The goal is to shift domestic consumption from imported goods to domestically produced goods. This can reduce the current account deficit (trade deficit).
* A tariff is applied per unit, so the price received by Canadian firms falls to Pw – tariff; the world supply curve shifts downward by the amount of the tariff.

* Domestic Qd increases due to lower price for Q2 (point D)
* Domestic Qs falls to Q3 (point B) due to lower prices

* For Pw tariffs, Qs in Q3 is greater than Qd in Q2, so Canada exports a smaller amount of Q3-Q2

Note:
IB Econ Paper Assessment for the Economic Model (at 12:25)
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Evaluation
Below is an assessment of the impact of the U.S. unit tariff on Canadian stakeholders.

1. Consumers are better off because their consumer surplus increases as a result of a price reduction from Pw to Pw – tariff
* Consumer surplus before US tariffs = area a
* Consumer surplus after tariff = areas a + b + c
* (a) is less than (a+b+c)
* Increased consumer surplus will thus lead to increased spending in other sectors of the Canadian economy, which in turn will lead to higher total revenues and profits for those firms, as well as more employment in those sectors.

2. Producers are worse off because their producer surplus and total revenue decrease as a result of the price reduction from Pw to Pw – tariff.
* Producer surplus before tariff = b + c + d + e + f + g + h + i + j
* Producer surplus after tariff = g + h + i + j
* (b+c+d+e+f+g+h+i+j) is greater than (g+h+i+j)
* TR1 (before tariff) = Pw x Q4
* TR2 = (Pw – Tariff) x Q3
* TR1 is greater than TR2

3. Workers in industries negatively affected by the U.S. tariffs are worse off as Canadian companies' Qs fall from Q4 to Q3, leading to increased unemployment of resources such as labor.

4. The US government wins and loses from the tariffs introduced
* The US government receives tariff revenues of e
* The US government will have caused political tensions with the governments of the exporting nations (Canada and Mexico) that are negatively affected by the tariffs (reduced exports by companies of these exporting nations: Canada and Mexico).

5. Global allocative efficiency is negatively affected because MB is larger than MC in the third quarter, leading to an underallocation of resources for the production and consumption of goods in the world economy (deadweight loss in area f).
* Welfare loss in area f = reduced production of productively efficient Canadian firms
* Welfare loss in area d = increased consumption of Canadian goods that should be exported to US consumers
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Chart B: Market, USD (as of 16:55)
* y-axis: CAD per USD
* x-axis: quantity in USD

* Reduced US imports of Canadian goods lead to a reduced USD supply in FOREX
* S1 to S2
* Appreciation of the US dollar (E1 to E2)
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Graphic B: Market, CAD (as of 5:38 p.m.)
* y-axis: USD per CAD
* x-axis: CAD quantity

* Reduced US imports of Canadian gods will lead to lower demand for CAD in FOREX
* D3 to D4
* Devaluation of the CAD (E3 to E4)

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