Final answer:
Signing a free trade agreement between the US and Brazil implies that trade becomes possible, which can lead to a convergence in commodity prices, such as sugar, as illustrated by the hypothetical example. For oil prices, while similar principles of convergence could apply, other global factors also significantly influence oil market prices.
Step-by-step explanation:
When the president signs a free trade agreement between the United States and Brazil, it opens up the possibility for firms to engage in trade to exploit differences in price levels between the two countries. Using the example of the sugar trade, prior to any trade, the equilibrium price of sugar in Brazil was 12 cents per pound, whereas it stood at 24 cents per pound in the United States. The introduction of trade would see firms buying sugar in Brazil at a lower price and selling it in the United States at a higher price.
As a result, the sugar price in both countries would eventually converge, settling at an equilibrium that benefits both countries’ consumers and producers, albeit in different ways. Brazilian sugar prices would increase due to the higher demand for exports, while in the United States, prices would decrease as the market receives an influx of imported sugar. In this hypothetical scenario, ignoring transaction costs, the equilibrium price of sugar with trade would be 16 cents per pound.
If trade spells similar dynamics for the oil market, we might also expect that the signing of a free trade agreement could result in the price of oil converging between the two countries. The impact on the price of oil, however, also depends on other factors such as production costs, transport costs, and global oil prices that are determined by the supply and demand in the world market.