Lesson Plan

• Define trade creation and trade diversion in the context of customs unions and free‑trade areas.
• Explain the mechanisms that generate trade creation and trade diversion when tariffs are removed.
• Analyse the welfare effects of trade creation and trade diversion for member and non‑member countries.
• Apply the concepts to real‑world examples and calculate the net welfare impact.

• Projector and screen
• PowerPoint slides with diagrams
• Printed handout containing definitions, comparative table, and practice question
• Calculator for each student
• Worksheet for group activity
• Whiteboard and markers

Begin with a quick poll: “Which recent trade agreement have you heard about and why does it matter?” Connect this to prior knowledge of tariffs and ask students to predict what happens when barriers are removed. State that by the end of the lesson they will be able to identify and evaluate trade creation and trade diversion and explain their welfare implications.

1. Do‑now (5’) – short quiz on tariffs and trade barriers to activate prior knowledge.
2. Mini‑lecture (10’) – introduce definitions of trade creation and trade diversion with a supply‑and‑demand diagram.
3. Guided example (12’) – work through the wheat example, calculate the welfare gain/loss using the provided formulas.
4. Group activity (15’) – students analyse the steel case, decide whether trade creation or diversion occurs, and compute the net welfare impact; groups present their reasoning.
5. Whole‑class discussion (8’) – compare outcomes, highlight policy implications, and clarify common misconceptions.
6. Exit ticket (5’) – each student writes one sentence summarising the overall welfare effect of a customs union.

Recap the key differences between trade creation and trade diversion and their impact on consumer and producer surplus. Collect the exit tickets to gauge understanding and address any lingering questions. For homework, assign students to research a real customs union (e.g., EU, NAFTA/USMCA) and write a brief report evaluating whether it has generated more trade creation or trade diversion.