The figure below depicts the steel market for Portugal, a small nation that is unable to affect the world price. Assume that Germany and France can supply steel to Portugal at a price of $200 and $300, respectively.

Figure 8.2. Portugal's Steel Market

-Consider Figure 8.2.If Portugal forms a customs union with France, the resulting trade creation effect equals $500.

Question

The figure below depicts the steel market for Portugal, a small nation that is unable to affect the world price. Assume that Germany and France can supply steel to Portugal at a price of $200 and $300, respectively.

Figure 8.2. Portugal's Steel Market

-Consider Figure 8.2.If Portugal forms a customs union with France, the resulting trade creation effect equals $500.

Quizplus · Accepted Answer

The trade creation effect measures the increase in trade between the countries in a customs union due to the elimination of trade barriers. In this case, the increase in trade between Portugal and France would result in a $500 gain in Portugal's steel market, indicating a positive trade creation effect.

The Figure Below Depicts the Steel Market for Portugal, a Small