Answer to Question #199632 in Macroeconomics for Joseph

Question

Discuss the welfare effects of a customs union.

Answer 1

The Welfare Effects of Customs Union

The principles of Trade Diversion and Production are so well-known that they don't need to be explained. The normative consequences of a customs union are unchanging regarding the three categories of national, union, or worldwide welfare, given the four assumptions of two products with constant costs, no demand impacts, and the world terms of trade. There can be no welfare exchanges between states if there are no provider surpluses. The two outcomes that were found fully examine the influence of customs unions on welfare by being given the framework. Aside from swapping one country for another as a commodity's supply source, one product would be replaced for another. At initially, this was only discussed from the perspective of consumption. The following was proposed as a simple extension:

a) Production Effects, which are divided into two categories: trade creation and trade diversion.

b) Effects of consumption

The substitution was expanded to include the area of manufacturing as well. Following the expansion, the complete name was changed to Intercountry replacement, split into two categories: trade formation and trade diversion. Then there was trade diversion, which included both consumption and manufacturing.