Question 1

(a) Summarise trade creation and trade diversion and analyse the dynamic benefits of a customs union with appropriate diagrams. (10 marks)

(b) For the Association of Southeast Asian Nations (ASEAN) only at its current stage as ASEAN Free Trade Area (AFTA), discuss whether it should move on to a customs union. (10 marks)

(c) Explain the relationship between exchange rate and the balance of payments. (15 marks)

(d) Show income determination in a closed economy in contrast to an open economy using the concepts of income as determined by injections (like investment and exports) and leakages (like saving and imports). (Hint: discuss in words like Singapore, with a high reliance on international trade and capital flows, is an open economy) (15 marks)