Lecture 3 - Are customs unions good or bad for the economy? Flashcards
Draw a tariff diagram for the Luxembourg shirt market where shirts originally cost £5 on the world market and a new tariff of £2 is imposed on shirt imports. Label all the areas on the diagram
See slide 8 of lecture 3
What is a non-preferential trade policy?
A non-preferential trade policy is one where either all imports were allowed in tariff-free, there is free trade or the same tariff is applied to all imports
What is a preferential trade policy and give an example of one
- A preferential trade policy is when a CU is created which treats imports from different origins differently
- For example, Luxembourg imports shirts from Germany tariff-free but imposes a tariff on Chinese-made shirts
How can we show that the welfare effect of trade diversion is negative whilst that of trade creation is positive?
- Consumers/Consumer surplus
- Producers/Producer surplus
- Taxpayers: Fall in tariff revenue
Under certain assumptions, changes in consumer surplus, producer surplus and taxpayer revenue give us an indication of the overall welfare impact
Draw a tariff diagram within a CU and label the TC and TD areas
See slide 15 of lecture 3