Theoriesof

Custom union

INTERNATIONAL TRADETopic-4

FTA, Eco, intigration,common mkt,.Partial

and general equilibrium theory.

1. Forms of eco. integration

1.Preferential trade area or association.

2.Free trade area.

3.Custom union.

5.Economic union.

4.Common market.

1.Preferential trade area or association.

It is also called trading block.

It gives preferential access to certain products from the

participating country.

In PTA tariff is reduced not abolished completely.

PTA gives preferential treatment to some member

countries.

PTA is first forms of eco. Integration.

2.Free trade area.

FTA consider as 2nd stage of eco. Integration.

In this eco int. member countries abolish all tariffs a

restrictions..

Member countries impose their own (different) tariff

upon non member countries.

Eg-letin America free trade area(NAFTA).

- European free trade association (EFTA).

3.Custom union.

It is 3rd forms of eco.int.

It is more formal types of eco. Int.

It is just like FTA but only difference is-

Member countries imposed same tariff on non-member

countries.

Eg- European union custom union.

C.U are established through trade pact.

4.Common market.

It is fourth forms of eco. Int.

It is more unified arrangement than custom uniion.

It allow free movement of labour and capital among

member country.

In C.M there is free and integrated movement of goods

and factors among member countries.

It imposed common external tariff on import from non-

member countries.

Eg- European common market.

5.Economic union.

Eco.union is high degree of cooperation..

In eco. Union there is free movement of goods and

services and the factor of production(L&K) .

Common external trade policy among member country,

Eg- European union.

2.Theories of custom union

Partial eqm

j.vinerProf. Lipsey,

J.Vanek

General eqm

Jacob viner

Partial equilibrium

In general custom union increases welfare but according

to Viner it is not necessary true.

He analyses production effect of C.U.

By trade creation and trade divergent.

C.U impose a common external tariff.

BOP in equilibrium of home country.

C.U. have both effect trade creation and trade divergent.

C.U gave result to gain in welfare through trade creation.

Lose in welfare by trade divergent.

C.U have both effect gain or loss of welfare.

Viner’s conclusion is valid if commodity consumed at fix

proportion and substitution effect is not present.

Assumptions.

Supply of factor input is fix.

Supy of production is perfectly elastic .

Supply curve are perfectly elastic in countries A & C.

Constant return to scale operate.

Prof. Lipsey, & J.Vanek

General equilibrium

Prof Lipsey and J. vanek analysis the theory of C.U in

general equilibrium.

The Lipsey model of C.U.

Lipsey put Viner’s model in general eqm.

He criticized Viner -

Lipsey conclude that there is no reduce in welfare due to

the formation of C.U. and trade divergent.

Lipsey put Viner’s model in general eqm.

He refute the conclusion of Viner- that commodity are

consumed at fix proprtion is invalid.

It indicates- TOT are improve for C.U and worsening

TOT rest of the world..

2.The Vanek model of C.U.

Vanek used techniques of offer curve to analysis general

eqm theory of C.U.

If CU imposed common tariff against world then the O-C

shift left of CU.

They analyzed consumption effect of C.U.

Vanek model established the relationship bw the level of

external tariff by C.U and welfare maximization of

member country of C.U.

Relationship bw- external tariff and maximum welfare..

Concept of Terms of trade.

INTERNATIONAL TRADETopic-5

Net barter TOT, gross barter TOT, income

ToT,single and double factor TOT/