A customs union will increase the welfare of its members and the rest of the world if:
A) trade creation is greater than trade diversion.
B) trade creation is less than trade diversion.
C) trade creation is positive.
D) trade diversion is positive.

Question

Quizplus · Accepted Answer

A customs union increases trade creation by eliminating trade barriers between member countries. This trade creation leads to increased competition, lower prices, and more efficient resource allocation. However, there is also the possibility of trade diversion, which occurs when trade shifts from lower-cost producers outside the customs union to higher-cost producers inside the union. If the trade creation is greater than the trade diversion, then the welfare of the members of the customs union and the rest of the world will increase.

A Customs Union Will Increase the Welfare of Its Members