7. Trade Creation is
âThe increase in trade
volume caused by union
with a lower cost (more
efïŹcient) supplier within
the trade blocâââViner, 1950
8. Trade Creation (High Cost to Low Cost)
P
Supply Home
Punion post tax
Pworld post tax
P*
Punion pre tax
Pworld pre tax
Demand Home
Q
B C* D
9. Trade Diversion (Low Cost to High Cost)
P
Supply Home
P*
Punion post tax
Pworld post tax
Punion pre tax
Pworld pre tax
Demand Home
Q
B C* D
21. The Effects of a Tariff
Before Tariff After Tariff Change
A+B+C+D
CS A+B -(C+D+E+F)
+E-F
PS G C+G +C
Govt.
None E +E
Revenue
A+B+C+D A+B+C+E
Total Surplus -(D+F)
+E+F+G +G
23. The Effects of a Tariff
âą A tariff reduces the quantity of imports and
moves the domestic market closer to its
equilibrium without trade.
âą With a tariff, total surplus in the market
decreases by an amount referred to as a
deadweight loss.
24. {The Effects of an Import Quota}
An import quota is a
limit on the quantity of
a good that can be
produced abroad and
sold domestically.
27. The Effects of an Import Quota
Because the quota raises the domestic price
above the world price, domestic buyers of the
good are worse off, and domestic sellers of
the good are better off.
License holders are better off because they
make a proïŹt from buying at the world price
and selling at the higher domestic price.
31. Before
After Quota Change
Quota
A+B+C+D -(C+D
CS A+B
+Eâ+Eââ+F +Eâ+Eâ+F)
PS G C+G +C
License
None Eâ+Eââ +(Eâ+Eââ)
Holder
A+B+C+D A+B+C
Total Surplus -(D+F)
+Eâ+Eââ+F+G +Eâ+Eââ+G
32. The Effects of an Import Quota
With a quota, total surplus in the market
decreases by an amount referred to as a
deadweight loss.
The quota can potentially cause an even
larger deadweight loss, if a mechanism such as
lobbying is employed to allocate the import
licenses.
40. Next Week
âą European Monetary Union
âą Read Wyplosz, C. âEuropean Monetary
Union: The Dark Sides of a Major Successâ,
Economic Policy, 2006.