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Student Essay

1632 words - 7 pages




Page 1

Static Effects of a Customs Union on World’s Welfare
In Figure A4-3.1 assume that Sa and Da are the internal supply and demand curves in country A for a given product. Sb and Sc are the exportsupply curves of countries B and C to country A, with C being a more efficient producer than B. Sbt and Sct are the same two supply curves subject to a 100 percent tariff imposed by country A. Curve St indicates total supply of the commodity in country A (Sa Sbt Sct). Price P1 is established. Country A produces Qa domestically and imports Qb and Qc from countries B and C, respectively. When countries A and B form a customs ...view middle of the document...

Area ZYP1P2 [the net gain in (a)] is equal by construction to areas EFGH in (b) plus RNOP in (c). Subtracting from this net gain in (a) the losses EHIF in (b) and RNOP in (c), we are left with a net gain of FIG in (b). Adding it to the earlier gain CIG, we obtain a net gain of CFG in part (b), to be weighed against the net loss of POKL in part (c). The net effect on world welfare depends on the relative size of the two areas.

2 This assumes that A’s tariff against outsiders remains unchanged, which is characteristic of a free-trade area rather than of a customs union. But the diagram can be adjusted to account for any modification in that tariff rate.





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St b S P1 u P2

St c Sb E H D F I C G R N O M J Qb1 (b) S K L Q Qc1 (c) Qc Q P W Sc

Da A B Z Y


Q Qa1 Qa (a)


The gain to world welfare from a customs union is a triangle CGF (in panel b) and the loss is area OPLK (in panel c).

Incidence of the Tariff Algebraic Approach Elasticity of Import Demand and the Domestic Demand and Supply Elasticities
The elasticity of import demand for a given product is positively (and uniquely) related to the domestic demand and supply elasticities, and negatively related to the share of imports in domestic consumption and production. Remembering that the volume of imports (Q m ) is the difference between the quantities demanded (Qd) and supplied (Qs) at home, we can derive the import-demand elasticity (∑D) from the definition of elasticity, as follows: ∑D P Qm P Qm Qm P Qd P P Qm P Qm (Qd P Q P Qs)

Next, we multiply and divide the first term of the last expression by Qd and the second term by Qs: P Qd Qd Qm Qd P Qm
d s



P Qs

Qs P Qm


Qs Qm




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where d and s represent domestic demand and supply elasticities, respectively. Thus, ∑D Qd Qm Qs Qm

A Country’s Share in World Export Markets and the Elasticity of Demand for its Exports
The elasticity of demand for a country’s exports of a given product is inversely related to its share in the world market. If W is the world demand for imports of a given product and C is the quantity exported by competing sources (other countries), then W C is the quantity exported by the country in question. Let x be the elasticity of demand for the country’s exports of the product; then P



Elasticity of Export Supply and the Domestic Demand and Supply Elasticities
The export-supply elasticity of a given product is positively related to the domestic demand and supply elasticities and negatively related to the share of exports in domestic production and consumption. Remembering that the volume of exports (Qe) is the difference between the quantities supplied and demanded domestically (Qs...

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