Extent of trade creation-trade diversion-laos and vietnam

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Problem: Laos and Vietnam are trade partners of Korea. Korea imposes a tariff of $20 on both countries. Korea concluded a Free Trade Agreement with Vietnam in 2015, eliminating tariff on imports only from Vietnam. Let import price from Laos be PL = $40, import price from Vietnam, PV = $50, and the tariff t = $20. Suppose q1 = 10, q2 = 20, q3 = 60 and q4 = 70.

a) After FTA, who loses and gains in Korea? By how much?

b) What is the extent of trade creation and trade diversion? Which effect is greater?

c) Who gains and loses in Vietnam?

d) Is it a good idea for Korea to have concluded this FTA with Vietnam?

849_Imports After FTA.jpg

Reference no: EM133062790

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