Darkuland is a small developing nation in Sub-Saharan Africa. It has for a long time closed its economy to the international market with the view to helping domestic industries to develop (The usual infant industry argument). As part of its policies, Darkuland has followed a fixed exchange rate regime and its associated exchange controls.

There is a heated argument on how much the official exchange rate (fixed at 30 Cedis to the US $) has to be devalued to reflect market conditions. From your earlier work on Darkuland you have estimated the market demand and supply of the Cedi to be:

DemandQ^d= 260 - 4C

SupplyQ^s= -40 + 2C (where 'C' is the amount of Cedis per US $).

1. Using the appropriate diagrams, discuss "trade creation" and "trade diversion".