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Customs Union: trade creation and diversion

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this is my homework for the Bob Hine course on "the Political economy of the European integration" at the College of Europe.
the views expressed are the full responsibility
of the author alone and do not engage the College of Europe.
les éléments contenus dans cette présentation n'engagent que son auteur et ne peuvent en aucune façon etre attribués au College d'Europe

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Customs Union: trade creation and diversion

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

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