Question
Country A is a small country considering joining a free trade area for trade in good X. The cost of importing a unit of good
Country A is a small country considering joining a free trade area for trade in good X. The cost of importing a unit of good X from countries that would not be members of the potential group is $10 per unit. The cost of importing a unit of good X from countries that would be members of the potential group is $20 per unit. Currently, country A applies a $5 per unit tariff on imports of good X from all sources. If the free trade group forms, will there be any trade creation or trade diversion? Illustrate and explain your answer with the aid of a diagram.
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