levo
Get notified

Globalisation

Trade creation and trade diversion

  • 3 things to know
  • Papers 2 and 3

Overview

Trade creation and trade diversion and Jacob Viner, consumer welfare gains, why diversion reduces world efficiency, classifying a switch in steel imports, the common external tariff, lost tariff revenue, blocs with similar industries, protected domestic firms, benefits of diversion to firms inside a bloc, and net welfare effects.

What you need to know

Answer each one before you reveal it.

Your recallNot started
Key term

Why is trade diversion a loss to world efficiency even when the bloc's members gain?

Key term

Define trade creation.

Key term

Why does trade creation raise consumer welfare?

Questions from this subtopic

Each one with the model answer underneath.

  1. 1

    Define trade creation.

    Model answer

    Trade creation occurs when joining a trading bloc shifts production from a higher-cost domestic producer to a lower-cost producer inside the bloc, which raises welfare.

  2. 2

    Define trade diversion.

    Model answer

    Trade diversion occurs when joining a trading bloc shifts imports from a lower-cost producer outside the bloc to a higher-cost producer inside it, because the outsider still faces the common external tariff.

  3. 3

    Which economist first distinguished trade creation from trade diversion?

    Model answer

    Jacob Viner.

  4. 4

    Why does trade creation raise consumer welfare?

    Model answer

    Consumers buy from the genuinely cheapest source, so the price falls, the quantity consumed rises and consumer surplus increases.

  5. 5

    Why is trade diversion a loss to world efficiency even when the bloc's members gain?

    Model answer

    Resources shift from the most efficient producer to a less efficient one, so more of the world's resources are used for the same output. The tariff revenue the importing government loses is a transfer to its consumers, not in itself a loss of world efficiency.

  6. 6

    A country joins a customs union and switches its steel imports from a non-member selling at £400 a tonne to a member selling at £450 a tonne. Is this trade creation or trade diversion?

    Model answer

    It is trade diversion, because the country has moved from a lower-cost external supplier to a higher-cost supplier inside the bloc.

See the rest and revise

Other ways to work this

The same content, four other ways.

What is inside Levo

Six ways to work the same material.

1Closed book
2Open book
3Closed book

See a huge jump in your memorisation

Answer cold, learn it, then prove it stuck. Levo tracks the jump between your first attempt and your last.

Scarcity, Choice and Potential Conflicts
Enterprise, Business and the Economy
Introducing the Market
The Role of Credit in the Economy

Cram a whole paper in one sitting

Sort every topic into what you know and what you do not, then drill only the weak ones.

Brazil, , India and China.
RussiaMexicoIndonesia

Blank Blitz consolidates the facts

Rapid timed gap-fills on the terms and numbers you need to recall without thinking.

ABorrowing becomes dearer and saving more rewarding.
BMortgage holders have less disposable income left.
CSpending on credit-financed items falls.

Build It trains answer structure

Assemble a full-mark answer from its marking points, in the order an examiner wants them.

Wage rate means the amount an employer pays for one hour of work.
TrueFalse

Test It catches misconceptions

Spot the fault in a statement. The traps are the mistakes students actually make.

721941163128510

Brain Breaks between sessions

Short focus games to reset attention, so the next set lands better than the last.

Every question in Globalisation, on a schedule.

Attempt a question from memory, write the correct version, then attempt it again. Levo records the jump between your first attempt and your last, and brings each question back on the day you are due to forget it.

Start revising, £5 a monthSee how the method works

Or £46 a year, about £3.83 a month. Cancel anytime.