Lecture 3 - Are customs unions good or bad for the economy? Flashcards

1
Q

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

A

See slide 8 of lecture 3

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2
Q

What is a non-preferential trade policy?

A

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

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3
Q

What is a preferential trade policy and give an example of one

A
  • 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
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4
Q

How can we show that the welfare effect of trade diversion is negative whilst that of trade creation is positive?

A
  • 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
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5
Q

Draw a tariff diagram within a CU and label the TC and TD areas

A

See slide 15 of lecture 3

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