Whether a customs union will increase or reduce net welfare is conditioned by the following factors: Effect # 1. Varying Elasticities of Demand and Supply Curves and Equal Price Differences: If the differences between pre-union free trade price (P2), the pre- union tariff-ridden price (P4) and post-union member country's price (P3) are exactly equal (P2P3 = P3P4) but the elasticities [...]
Jacob Viner's partial equilibrium analysis, based upon trade creation and trade diversion effects, is undoubtedly useful but is only of elementary character. The writers like R.G. Lipsey and J. Vanek have analysed the theory of customs union in the general equilibrium framework. 1. The Lipsey Model of Customs Union: In the partial equilibrium approach, Jacob Viner pointed out that trade [...]
In this article we will discuss about:- 1. Dynamic Effects of Customs Union 2. Theory of Customs Union as the Theory of Second Best 3. Intra-Industry Trade and Customs Union. Dynamic Effects of Customs Union: The static effects of customs union are- (i) trade- creation and (ii) trade-diversion. The static effects are basically concerned with reallocation of production and consumption. [...]