chapter8 (2) - Trade creation occurs when a member country...

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Trade creation occurs when a member country imports a product from another member country that it made for itself before. Gain in consumer surplus for importing country due to lower prices. Gain in producer surplus for exporting country due to increased sales. No other country is affected because the good was not traded at all before—welfare gains for both countries. Same as opening trade effect in Ricardian or HO models. Trade Creation and Trade Diversion Trade diversion occurs when one member country imports a product from another member country that it was previously importing from an outside country. Trade is taken away from one country and moved to another country. This is not always the most efficient move since the former country might have been producing at lower costs, but due to changes in tariffs, it ends up cheaper to import from the member country. The U.S. and South Korea are forming a free trade agreement. The agreement looks beneficial, especially for these two countries. Significant reduction in tariffs, liberalization for U.S. farm exports, greater
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chapter8 (2) - Trade creation occurs when a member country...

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