Lecture 2

Question 1

custom union

Answer 1

type of trade bloc which is composed of a free trade area with a common external tariff

Question 2

advantages of custom union

Answer 2

1) free trade advantages
2) (external tariff) helps home producers increase share of the home market
3) (external tariff) generates revenue for the government

Question 3

rules of custom union

Answer 3

1) end all tariffs and quotas within
2) replace the tariffs with other countries with a common external tariff
3) they are required to share the revenue of the common external tariff

Question 4

how do we know if the CU is beneficial or not?

Answer 4

depends on whether there is trade creation or trade diversion

Question 5

trade creation

Answer 5

creation of new trade

Question 6

trade diversion

Answer 6

trade is diverted from a more efficient exporter towards a less efficient

Question 7

assumptions of the Jacob Viner Theory

Answer 7

1) 3 countries home/partner/rest of world
2) there’s 1 good - partial equlibrium
3) perfect competition- given supply price
4) demand for good is given and not effected by supply price
5) focus on the cost of supply

Question 8

IS IT TRADE CREATION OR DIVERSION 
source of supply
				home	partner	rest of world	
before CU		£	   £		£
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
= price to 		9	   15		12
   consumer		
--------------------------------------------------------------
with CU
production cost	9	   5		4
\+200% tariff		0	   0		8
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
= price to 		9	   5		12
   consumer

Answer 8

Creation because switched from 9-> 5 consumers pay price lowered by -4 no loss of revenue for govenrment

Question 9

IS IT TRADE CREATION OR DIVERSION 
source of supply
				home	partner	rest of world	
before CU		£	   £		£
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
= price to 		9	   10		8
   consumer					
--------------------------------------------------------------
with CU
production cost	9	   5		4
\+100% tariff		0	   0		4
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
= price to 		9	   5		8
   consumer

Answer 9

Diversion because now we buy from partner rather than the most efficient seller consumers gain smaller prices -3 revenue loss for government 4
OVERALL= 3-4= -1 loss