True or False: Relative to a global tariff, the effect of creating a customs union in Luxembourg is negative. O True O 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. Greater competition () Successful collusion of domestic producers () A one-time boost to economic welfare (J Increased investment 4. Effects of a regional trading arrangement Consider a hypothetical world consisting of only three countries: Luxembourg, the United States, and Germany. Each country produces grain. Luxembourg is a small economy compared to the United States and Germany and thus cannot influence foreign prices. On the following graph, the supply and demand schedules of Luxembourg are shown as Spux and Dyux. Foreign supply schedules of grain are perfectly elastic: The United States is a more efficient supplier of grain than Germany because its supply price is $0.80 per bushel (Sys), whereas Germany's supply price is $1.60 per bushel (Sger). @ e s 5 a w o x o 0 36 GRAIN (Thousands of bushels) Calculate the quantity of bushels Luxembourg imports when the three nations engage in free trade. Enter this value in the first row of the following table. Also indicate which country Luxembourg imports from. Imports Scenario (Thousands of bushels) Imports from... Free trade v With tariff w With customs union v At some point in time, Luxembourg decides to protect its domestic grain producers and imposes a tariff of $1.60 per bushel of grain on imports from both the United States and Germany. Sus+ T and Sger+ T represent the after-tariff prices for both countries. In the second row of the previous table, enter the quantity of bushels Luxembourg imports with the tariff and the country it imports from. Later on, Luxembourg and Germany form a customs union as part of a trade liberalization agreement, while the trade between Luxembourg and the United States continues with the previous terms. In the last row of the previous table, enter the quantity of bushels Luxembourg 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. Effect Consumption effect Favorable production effect Trade creation effect Trade diversion effect