Chat with AIExam 17: Economic Integration
(a) Define "trade creation" in the context of the formation of a customs union. Then, using a demand/supply diagram of a (small) home country for a good that is produced at home and would be imported if there were no tariff, illustrate and explain how the formation of a pure trade-creating customs union can enhance the country's well-being. What factors would be conducive to a greater rather than a smaller gain from the trade creation?
(b) Define "trade diversion" in the context of the formation of a customs union. Then, using a demand/supply diagram of a (small) home country for a good that is both produced at home and imported, illustrate and explain how the movement from a situation of a uniform tariff on imports of the good from all countries to a situation of a trade-diverting customs union with one particular country can affect consumer and producer surplus and government revenue in the home country. Why can we not be sure that welfare in the home country will rise? Under what general conditions would it be likely that this trade-diverting customs union would injure welfare in the home country?
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Answered by Examlex AI Copilot(a) Trade creation refers to the situation where the formation of a customs union leads to an increase in overall trade and production of goods within the member countries, resulting in a more efficient allocation of resources and higher overall welfare. This occurs when the customs union allows for the elimination of tariffs and other trade barriers between member countries, leading to the production of goods in the most efficient locations and the consumption of goods at lower prices.
In the context of a small home country, the formation of a pure trade-creating customs union can enhance the country's well-being by allowing for the importation of goods at lower prices, leading to an increase in consumer surplus. This can be illustrated using a demand/supply diagram, where the removal of tariffs shifts the supply curve to the right, leading to a decrease in the price of the imported good and an increase in consumer surplus. Additionally, the increase in trade and production within the customs union can lead to economies of scale and increased efficiency, further enhancing the country's well-being.
Factors that would be conducive to a greater gain from trade creation include a larger reduction in tariffs, a greater similarity in production capabilities and consumer preferences among member countries, and the presence of complementarity in production processes among member countries.
(b) Trade diversion refers to the situation where the formation of a customs union leads to a shift in trade from more efficient non-member countries to less efficient member countries, resulting in a decrease in overall welfare. This occurs when the customs union imposes tariffs and other trade barriers on imports from non-member countries, leading to the production and consumption of goods in less efficient locations and at higher prices.
In the context of a small home country, the movement from a situation of a uniform tariff on imports to a trade-diverting customs union with one particular country can affect consumer and producer surplus and government revenue. This can be illustrated using a demand/supply diagram, where the imposition of tariffs on imports from non-member countries shifts the supply curve to the left, leading to an increase in the price of the imported good and a decrease in consumer surplus. Additionally, the trade diversion can lead to a decrease in government revenue from tariffs on imports from non-member countries.
We cannot be sure that welfare in the home country will rise under a trade-diverting customs union because the increase in consumer and producer surplus from trade diversion may be offset by the decrease in consumer and producer surplus from the less efficient production and consumption of goods within the customs union. Under general conditions, it would be likely that a trade-diverting customs union would injure welfare in the home country if the member country has a comparative disadvantage in the production of the good in question, and if the non-member countries have a comparative advantage in the production of the good. Additionally, if the trade diversion leads to a decrease in overall trade and production, it can lead to a decrease in overall welfare.
In general, other things equal, trade creation is more likely to outweigh trade diversion for a home country forming a customs union with partner countries (i) if the total number of countries forming the union is __________, and (ii) if the level of tariffs in the home country prior to the formation of the union is __________.
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VerifiedC
Which one of the following sets of countries contains only members of the European Union?
(28) VerifiedD
In considering "trade creation" and "trade diversion" in the formation of a customs union Between countries and whether the customs union enhances welfare in a home country Joining the union, two general conclusions that seem valid are that the customs union is More likely to enhance welfare, other things equal, (i) the __________ the initial tariff rates of the home country on imported goods, and (ii) the __________ the demand and supply curves of the affected products in the home country.
(31) In the diagram in Question #8 above, suppose that country A, from this initial situation Where its tariff is applied to both countries B and C, now forms a customs union with country C. The "net welfare effect" on country A from the formation of this customs union with country C would be __________.
(42) The following diagram pertains to good X for country A, where DA is the demand for X By A's consumers, SA is the supply curve of X from A's home producers, SB is the Horizontal supply curve of X to country A from country B, SC is the horizontal supply Curve of X to country A from country C, and S'B and S'C are the horizontal supply curves From B and C, respectively, with a tariff in place. With the tariffs in place for both Countries B and C, imports of good X into country A are represented by distance__________.
(36) If two countries remove all tariff and nontariff barriers to trade between them, adopt a common external tariff on imports from the outside world, and permit free factor movements between themselves, but take no further steps toward economic integration, this economic coalition that has been formed is a
(35) Other things equal, would the formation of a customs union with many members be more likely or less likely to improve welfare for a given member country than the formation of a customs union with only a few members? Why or why not? Other things equal, would the formation of a customs union be more likely or less likely to enhance welfare for a given member country if that country had very high preunion tariffs than if it had very low preunion tariffs? Why or why not?
(33) To which one of the following agreements or groups is the United States NOT a signatory Or member?
(36) If two countries remove all tariffs on each other's products and establish a common set of tariffs against the rest of the world, but take no further steps toward economic integration, these two countries have formed
(34) In a production-possibilities/indifference curve diagram, when a (small) country moves From a situation of free trade to a situation of a uniform ad valorem tariff on imports from All trading partners, the ratio of the domestic price of the country's export good to the Domestic price of the country's import good __________.
(32) When the European Community was originally formed, it was determined that the common external tariff on outside world products should be equal to the average of the preunion tariffs of partner countries on the outside world. This rule was adopted so that there would not be a net increase in protection against the outside world. Thus some partners raised tariffs on some products and lowered them on others. See if you can show how this "averaging" rule would complicate the process of making welfare judgments about the likely effects of the original formation of the EC on the member countries.
(34) In the diagram in Question #8 above, suppose that country A, from this initial situation Where its tariff is applied to both countries B and C, now forms a customs union with Country B. The "net welfare effect" on country A from the formation of this customs Union with country B would be __________.
(25) If good X from country C faces a 10 percent tariff in country A and a 20 percent tariff in country B, but if A and B have free trade between each other, then A and B are part of which one (and only one) of the following types of groupings?
(34) The country that claims to have a greater number of economic integration trade Agreements in place than any other country is
(29) When the European Community began operation in 1958, how many countries belong to this union?
(41) Which of the following is considered to be a positive dynamic effect of integration?
(34) Jacob Viner originally envisioned a situation where, in the demand/supply graph of a trade-diverting customs union, the demand curve was vertical and all supply curves (including the supply curve of domestic producers) were horizontal. In this situation, could the trade-diverting customs union ever enhance the home country's (country A's) welfare? Explain.
(32) In considering "trade creation" and "trade diversion" in the formation of a customs union Between countries and whether the customs union enhances welfare in a home country Joining the union, two general conclusions that seem valid are that the customs union is Less likely to enhance welfare, other things equal, (i) if the union contains a __________ Number of countries and (ii) if costs of production in the partner countries in the case of Trade diversion differ __________ from costs of production in the outside world (the non-
Member countries).
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