May anybody help me with this question, thanks! Figure 7.1 shows an importing co
ID: 1217629 • Letter: M
Question
May anybody help me with this question, thanks!
Figure 7.1 shows an importing country before the formation of a customs union. Sn represents the supply from future non-members, Sm represents the supply from future members, and T is the tariff. Assume that after the formation of the customs union, T is maintained against non-members and eliminated for members. Where necessary, use letters from Fig. 7.1 to answer the following questions.
a) What is the level of domestic production, domestic consumption, and imports prior to the formation of the customs union? From which nation will these imports be purchased?
b) What is the level of domestic production, domestic consumption, and imports after the formation of the customs union? From which nation will these imports be purchased?
c) Will the customs union be trade diverting or trade creating? Explain.
d) Will there necessarily be gains from the formation of such a customs union?
Figure 7.1 + T +TExplanation / Answer
a. domestic production = Q3
domestic consumption = Q6
and imports prior to the formation of the customs union = Q6 - Q3
From which nation will these imports be purchased = Future Member countries
b.
domestic production = Q1
domestic consumption = Q8
and imports after the formation of the customs union = Q8 - Q1
From which nation will these imports be purchased = MEMBER NATIONS
c. the customs union will be trade trade creating as before the union only (Q6 - Q3) is imported, but now after the union (Q8 - Q1) is imported , hence trade has increased and exporting countries are same in both the cases.
d. In the given example, yes there will be gains as even if future non members form a union still there is gains,
But in general, this is n't going to be the case always as there may be cases where even after no tariffs the price of the union might be higher then the price at ehich non members supply, so there will be non gains from forming the union.