Question:
How can Trading Blocs help lead to Trade Creation?
Author: eric_galvaoAnswer:
-Assume there are 2 Nations: Countries A and B. B is the most Efficient Producer of Tea -A is part of a Customs Union that imposes a Tariff on Importing Tea. The Price of Tea in A is P1 which is the Price of Tea that B Exports for + Tariff -If B joins Custom Union, the Tariff will be removed and the Price will fall. Consumption Rises and Domestic Producer. -A is now importing more Tea from the Most Effieicny Producer. Hence, trade has been Created. -The government does lose taxation, but Consumer Surplus does Increase. The Overall gain for the Nation is just more Consumer Surplus
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