A seminar exercise on economic integration
Cillian Ryan, University of Birmingham
Put online November 2009
This text is extracted from seminar materials for a class in European Economic Issues. This is a class activity given in Week 4/5 of a 1st year course. The materials have been shared through the TRUE wiki for European Economics. They are available under a Creative Commons license, some rights reserved.
Before solving the problem below, recall the different degrees of economic integration.
The diagram below shows the demand and supply diagrams or schedules for steel in a country which is not, initially, a member of the European Union.
a) What would be the equilibrium price and quantity in autarky (that is, before the country engages in any trade)?
b) Now assume that the country opens its borders for trading in steel. If the world market price of steel is 200 and the country imposes a 100% custom tariff on steel (doubling the price to 400) how will the quantity and the price change compared to question ‘a’?
c) If the country joins a customs union such as the EU and the price of steel is 300 inside the customs union and the EU levies the same 100% customs tariff on steel from outside the union, how will that change consumption and the pattern of supply from producers by domestic, customs union and foreign producers?
d) How much is the value of trade creation and trade diversion (compared to question ‘b’)?
e) If you compare these values did the country win with the customs union or lose (if we take into consideration trade in steel only)?