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Customs Union: trade creation and diversion
1. Homework on B.Hine course Anna Dekalchuk October, 17th Customs Union: trade creation and trade diversion home supply demand price P3 Sw + tariff v x y w Sp P2 v1 w1 x1 y1 Sw P1 O A C quantity D B
2. (P3) OA – home production OB – home demand AB – import (wherever) (P3) producers’ surplus: +v+v1+k (blue triangle) home supply demand price P3 Sw + tariff v x y w Sp P2 v1 w1 x1 y1 Sw P1 k O A C quantity D B
3. (P2) OC – home production OD – home demand CD – import (partner) (P2) producers’ surplus: +v1+k (blue triangle) home supply demand price (P2) producers’ surplus: loss of -v (pink trapezium) P3 Sw + tariff v x y w Sp P2 v1 w1 x1 y1 Sw P1 k O A C quantity D B
4. (P3) OA – home production OB – home demand AB – import (wherever) (P3) consumers’ surplus: +r (blue triangle) home supply demand price r P3 Sw + tariff v x y w Sp P2 v1 w1 x1 y1 Sw P1 O A C quantity D B
5. (P2) OC – home production OD – home demand CD – import (partner) (P2) consumers’ surplus: +r+v+w+x+y (blue&pink triangle) home supply demand price r (P2) consumers’ surplus: gain to +v+w+x+y (pink trapezium) P3 Sw + tariff v x y w Sp P2 v1 w1 x1 y1 Sw P1 O A C quantity D B
6. (P3) OA – home production OB – home demand AB – import (wherever) (P3) imports (wherever): imports are AB world receives P1 = t (yellow rectangle) home supply demand price P3 Sw + tariff (P3) tariff revenue: P1P3 x AB = +x+x1 (green rectangle) v x y w Sp P2 v1 w1 x1 y1 Sw P1 t O A C quantity D B
7. (P3) OA – home production OB – home demand AB – import (wherever) (P2) OC – home production OD – home demand CD – import (partner) home supply demand price (P2) imports (partner): imports are CD partner receives P2 (yellow rectangle) P3 Sw + tariff v x y w Sp P2 v1 w1 x1 y1 Sw P1 (P2) tariff revenue: 0 in comp.to P3: -x-x1 BUT: h.producers produce less OA-CA = OC BUT: consumption increases OB+BD O A C quantity D B
8. net welfare effect of CU (the Hicks-Kaldor compensation principle) (P2) producers’ surplus: -v home supply demand price (P2) consumers’ surplus: +v+w+x+y (P2) Taxpayer revenue: -x-x1 Net: +w+y-x1 P3 Sw + tariff v x y w Sp P2 v1 w1 y1 x1 Sw P1 O A C quantity D B
9. TC: light violet trapezium (2 parts) TD: light pink square home supply demand price Net: +w+y-x1 P3 Sw + tariff v x y w Sp P2 y w v1 w1 y1 x1 Sw P1 x1 Trade creation-diversion ration: O A C quantity D B