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Title: Trade Creation and Diversion
Description: These notes present the situation of trade creation where the impact on supply and demand is analysed when a world tariff is abolished which lowers the price. In addition to this, the situation of trade diversion is explained which is a situation in which trade is diverted from a more efficient exporter towards a less efficient one by the formation of a free trade agreement or a customs union.
Description: These notes present the situation of trade creation where the impact on supply and demand is analysed when a world tariff is abolished which lowers the price. In addition to this, the situation of trade diversion is explained which is a situation in which trade is diverted from a more efficient exporter towards a less efficient one by the formation of a free trade agreement or a customs union.
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P
TRADE CREATION
S uk
1,2,3,4 – Gain in consumer surplus
2,4 – Net gains from trade
3 – Loss in tax revenue for the government
1 – Loss in producer surplus
S World + Tariff
P1
1
3
2
4
S World
P2
D
0
Q3
Q1
Q2
Q4
Q
*If areas 2,4 are larger than 5 then it is possible
the UK could experience in net welfare
TRADE DIVERSON
S uk
Definition – trade diversion relates to a
situation in which trade is diverted from a
more efficient exporter towards a less
efficient one by the formation of a free trade
agreement or a customs union
Title: Trade Creation and Diversion
Description: These notes present the situation of trade creation where the impact on supply and demand is analysed when a world tariff is abolished which lowers the price. In addition to this, the situation of trade diversion is explained which is a situation in which trade is diverted from a more efficient exporter towards a less efficient one by the formation of a free trade agreement or a customs union.
Description: These notes present the situation of trade creation where the impact on supply and demand is analysed when a world tariff is abolished which lowers the price. In addition to this, the situation of trade diversion is explained which is a situation in which trade is diverted from a more efficient exporter towards a less efficient one by the formation of a free trade agreement or a customs union.