chapter8 (3) - So what are the economic effects of regional...

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So what are the economic effects of regional trade agreements, in either case? Trade Creation and Trade Diversion When trade agreements are made, the increased trade can be of two types. Trade Diversion in a Graph Equilibrium is at A, importing a total of Q 1 at a price of P asia +t. Of total imports, Q 2 comes from Mexico at B, since under perfect competition these imports have the same tariff-inclusive price as those from Asia. Tariff revenue is collected on imports from both Mexico and Asia as (a+b+c+d). Trade Diversion in a Graph After Mexico joins NAFTA, it can sell duty-free to the U.S. The relevant supply curve is now S mex and imports from Mexico increase to Q 2 at C. The price charged remains P asia +t since Mexico’s MC has increased along its supply curve, so the price to U.S. has not changed. U.S. loses tariff revenue of (a+b+c). Mexico gains producer surplus of (a+b). The combined effect of NAFTA is a loss of
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This note was uploaded on 02/17/2012 for the course EC 340 taught by Professor Ballie during the Spring '10 term at Michigan State University.

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chapter8 (3) - So what are the economic effects of regional...

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