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.The value of the trade creation effect resulting from the Greece/France customs union equals
Definitions:
Nominal Interest Rate
The rate of interest before adjustments for inflation, representing the face value of interest payments.
Inflation-adjusted Value
The value of money after accounting for changes in price level over time, adjusting figures to reflect current purchasing power.
Equilibrium Interest Rate
The interest rate at which the demand for money in an economy equals the supply of money, establishing a state of balance in the financial markets.
Real Rate
The interest rate adjusted for inflation, reflecting the true cost of borrowing or the true return on an investment.
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