1. Study Unit 6
Ms. K Amusa

2. How to use these slides? While working through these slides:
Keep your study guide and textbook open next to you.
Ask questions if there is anything you do not understand.
These slides do not cover the entire chapter, only some of the important points. Make sure you also study the other parts as stipulated by your study guide.
Remember to make notes!

3. Follow us in your textbook…
11th ed. pg
and
10th ed. pg
and

4. Trade Liberalization and Economic integration
Forms of economic integration include
Preferential trade agreements e.g. British commonwealth preferential scheme.
Free trade agreements e.g. NAFTA, SADC
Customs union e.g. SACU
Common market
Economic union e.g. EU.

5. Static effects of custom union can be explained by trade creation and trade diversion.
Trade creation occurs when high cost imports from a member nation is replaced by low cost imports from another member state.
Trade creation is favorable.
Trade diversion occurs when low cost imports from non-member nations are replaced by high cost imports from member states.
Trade diversion is not favorable.
As tariffs are removed consumption increases as goods are now cheaper.

6. Do the following true or false questions…
The higher the level of economic integration between countries, the greater the loss of economic sovereignty.
Trade creation occurs when a customs union leads to higher cost domestic production being replaced by lower cost imports.
In trade diversion, imported goods enter a high tariff country through a low tariff member country.

7. Dynamic effects include:
Increased market size
Increased competition
Increased economics of scale
Growth stimulates imports from non-member states, offsetting to some extent the impact of trade diversion.
Increased investment.

8. Illustrations of trade creating and trade diverting customs unions
Figure 10.1 (pg. 291) Follow animations in you textbook
Free trade
PX =$2
PX($) DX SX
Before a custom is formed, at a tariff of PX =$2 E
Nation 2 consumes 50X, with 20X produced locally and 30X imported 2
Tariff revenue
Imported 30 1 20 50 X

9. Illustrations of trade creating and trade diverting customs unions
Figure 10.1 (pg. 291) Follow animations in you textbook
Do not trade with countries where tariff is PX >$2
PX($) DX SX E
After forming a custom, this nation consumes 70X, produce 10X and import 60X 2 1 10 20 50 70 X

10. Illustrations of trade creating and trade diverting customs unions
Figure 10.1 (pg. 291) Follow animations in you textbook
PX($) DX SX
Net static gain= sum of two triangles ($15)
Transfer from domestic producers to domestic consumers E 2 1 10 20 50 70 X

11. Also study…
Figure 10.2 (pg. 293)

12. Do the following questions…
Explain and graphically illustrate the economic effects of a trade creation customs union.
Explain the dynamic effects of a customs union.

13. End of study unit 6