Trade creation/diversion & quota diagrams Flashcards
What is the demand curve called on a tariff diagram?
Local demand
What axes do tariff & quota diagrams use?
Micro axes & labels
What is the normal supply curve called on a tariff diagram?
Domestic supply (S Dom)
How many horizontal S curves are there on a normal tariff diagram?
2
How many quantity labels are there on a tariff diagram & where should they go?
4- q1 and q 4 at original S&D equ.
q2 & q3 at new equ.
What is trade creation?
Refers to the increase in economic welfare from joining a FTA e.g. a customs union- causing a reduction in tariff barriers
What effect does trade creation have?
Decreases prices, increasing consumer surplus & economic welfare, decreasing producer surplus. More trade with members of customs union
What is the 1) higher & 2) lower horizontal S curve labelled as on a trade creation diagram?
1) S world+tariff
2) S world
Which areas are labelled on a trade creation diagram?
1,2,3&4 all between Sworld & Sworld+T
1=Quadrilateral to the left of Sdom
2= Triangle between Sdom & left of Q2 (up to where Sdom=Sworld+T
3= Rectangle between Q2 &Q3 (Q’s that both go up to where Sworld+T= Sdom & D)
4= Triangle between Sworld & right of Q3 (goes to where D=Sworld+T)
How could you demonstrate the impact of a tariff being imposed?
Draw a trade creation diagram but the opposite way round
When does trade diversion occur?
Due to the existence of a common external tariff (CET)
Why is it called trade diversion?
The country is “diverted” from countries outside the customs union to countries within it
What should you do when doing trade diversion?
Read the content of the question carefully- will determine where the Q starts (e.g. with tariff or without)
How many horizontal lines are there on a trade diversion diagram & what do they mean?
3- Top= External supplier with tariff (after joining a customs union)
Middle= Customs union supply
Bottom= External supplier without tariff (before customs union)
On trade creation/diversion diagrams, what is the P label for the horizontal lines?
P (same as supply line)
e.g. S EU price = P EU
