4. Effects of a regional trading arrangement Consider a hypothetical world consisting of only three countries: Liechtenstein, Canada, and France. Each country produces grain. Liechtenstein is a small economy compared to Canada and France and thus cannot influence foreign prices. On the following graph, the supply and demand schedules of Liechtenstein are shown as Schand DLch Foreign supply schedules of grain are perfectly elastic: Canada is a more efficient supplier of grain than France because its supply price is $1.00 per bushel (Scan, whereas France's supply price is $2.00 per bushel (SF). PRICE (Dan) 10.00 0.00 8.00 7.00 600 ST 4.00 300 5. +T 5 A 1.00 12 18 21 21 2 GRAIN (Thousands of bushels) (?) Calculate the quantity of bushels Liechtenstein imports when the three nations engage in free trade. Enter this value in the first row of the following table. Also indicate which country Liechtenstein imports from. Scenario Free trade Imports (Thousands of bushels) Imports from With tariff With customs union At some point in time, Liechtenstein decides to protect its domestic grain producers and imposes a tariff of $2.00 per bushel of grain on imports from both Canada and France. Scart T and SF+ T represent the after-tariff prices for both countries. In the second row of the previous table, enter the quantity of bushels Liechtenstein imports with the tariff and the country it imports from. Later on, Liechtenstein and France form a customs union as part of a trade liberalization agreement, while the trade between Liechtenstein and Canada continues with the previous terms. In the last row of the previous table, enter the quantity of bushels Liechtenstein imports with the customs union and the country it imports from. Complete the following table by identifying which trade effect of the customs union formation is represented by each of the shaded areas on the previous graph. Check all that apply. Area Effect Consumption effect Favorable production effect Trade creation effect Trade diversion effect A B C D True or False: Relative to a global tariff, the effect of creating a customs union in Liechtenstein is negative. True False Welfare effects of a regional trading arrangement are not always static. There are also dynamic gains that influence growth rates over the long run and offset unfavorable static effects due to trade diversion. Which of the following represent dynamic gains from creating a customs union? Check all that apply. The trade-creation effect Market enlargement Greater competition Higher tariff revenues