Activity C

The interactive exercise that follows allows you to explore the comparative statics of the trade diverting customs union in more depth. By dragging the buttons on the left hand side of the screen you are able to see the effect of the relative sizes of the positive trade-creation effects (orange triangles) and the trade-diversion effect (lower red rectangle) of:

1. a change in the difference between P_J and P_EU, and
2. the elasticity of demand for motorcycles

Once you have played around with this exercise, write down two general statements summarising the effect of these two factors on the expected welfare effects of the customs union.

You can check your answer in the next section of the CD.