Table 1 shows the supply and demand schedule of leather belts for Philippines, a small nation that is unable to affect the World price of leather belts.

Table 1: Supply and Demand for Leather Belts: Philippines

Price ($) Quantity Supply Quantity Demand

90 36 0

80 32 4

70 28 8

60 24 12

50 20 16

40 16 20

30 12 24

20 8 28

10 4 32

0 0 36

Hint: Draw this information on a demand and supply graph. It will help with the analysis.

(i) Assume that Italy and China can supply leather belts to Philippines at a price of $20 and $30, respectively. In the presence of free trade, which nation exports leather belts to Philippines, how many leather belts does Philippines consume and import? [3 points]

(ii) Suppose Philippines levies a 100 percent nondiscriminatory tariff on its leather belts imports. Which nation exports leather belts to Philippines? How many leather belts will Philippines produce, consume, and imports? [3 points]

(iii) Now suppose Philippines forms a customs union with China. Determine the trade creation effect and the trade diversion effect of the customs union. What is the customs union's overall effect on the welfare of Philippines? [6 points]

(iv) Assume instead that Philippines forms a customs union with Italy. Is this a trade diverting or trade creating customs union? By how much does the customs union increase or decrease the welfare of Philippines ? [6 points]