Figure 8.1 depicts the supply and demand schedules of calculators for Greece,a "small" country that is unable to affect the world price.Greece's supply and demand schedules of calculators are respectively depicted by SG and DG.Assume that Greece imports calculators from either Germany or France.Suppose Germany is the world's low-cost producer who can supply calculators to Greece at $20 per unit,while France can supply calculators at $30 per unit.
Figure 8.1.Effects of a Customs Union
-Consider Figure 8.1.Comparing the trade creation and trade diversion effects,the impact of the Greece/France customs union on the welfare of Greece is:
Definitions:
Eurobond Agreement
An international bond that is denominated in a currency not native to the country where it is issued, often used by companies and governments to raise capital.
Short-Term
Relating to a brief period of time, typically less than a year.
Covered Interest Arbitrage
A strategy where investors exploit the interest rate differential between two countries while covering exchange rate risk, aiming for guaranteed returns.
Forward Rates
Forward rates are interest rates or foreign exchange rates fixed now for a financial transaction that will occur at a future date.
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