In considering "trade creation" and "trade diversion" in the formation of a customs union Between countries and whether the customs union enhances welfare in a home country Joining the union, two general conclusions that seem valid are that the customs union is More likely to enhance welfare, other things equal, (i) the __________ the initial tariff rates of the home country on imported goods, and (ii) the __________ the demand and supply curves of the affected products in the home country.

Question

Quizplus · Accepted Answer

Higher initial tariff rates mean that there is more room for trade creation, which occurs when the customs union eliminates tariffs between member countries and enables trade to occur more efficiently. Additionally, more elastic demand and supply curves in the home country mean that there is more potential for trade diversion, which occurs when the customs union leads to the home country shifting from lower-cost non-member countries to higher-cost member countries for certain goods. This can lead to a welfare loss in the home country. Therefore, a customs union is more likely to enhance welfare in the home country if initial tariff rates are higher and demand and supply curves are more elastic.

In Considering "Trade Creation" and "Trade Diversion" in the Formation