Special sectionMeasuring trade creation and trade diversion in the Central American common market: A hicksian alternative
Review articleOpen access
Abstract:

AbstractA large number of empirical studies on customs union formation or economic integration base their evaluation of the welfare implications of regional integration schemes on trade creation and trade diversion measures that are derived from an ordinary Marshallian import demand curve. This approach is, however, influenced by the path dependence problem which affects the reliability of the estimated results. This paper derives alternative Hicksian measures of trade creation and trade diversion using the popular notions of compensating and equivalent variation. These notions allow for more “exact” estimation of the welfare impact since they incorporate the path independence condition. These new measures are applied to the integration effort in the Central American Common Market (CACM). The overall results show that economic integration in Central America has been largely trade diverting for the selected commodity groups.

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