In terms of static economic analysis, if a customs union results in a large amount of trade creation relative to trade diversion, world welfare
A) increases.
B) decreases.
C) either increases or decreases.
D) neither increases nor decreases.

Question

Quizplus · Accepted Answer

Trade creation refers to an increase in trade between member countries due to the removal of trade barriers. Trade diversion refers to a shift in trade away from more efficient non-member countries towards less efficient member countries. If trade creation is larger than trade diversion, then the customs union is likely to lead to a net increase in overall trade, leading to an increase in world welfare. Therefore, the correct choice is A) increases.

In Terms of Static Economic Analysis, If a Customs Union