ABSTRACT
A drawback of much of the literature analysing the welfare implications of customs unions and other second-best policy measures is its reliance upon the assumptions that an individual's utility is cardinally measurable and that different individuals' utilities can be added together to obtain a social welfare function. This chapter describes the ordinalist approach of Vanek and Kemp in further investigating the welfare effects of customs unions and preferential trading arrangements. It purposes to investigate the world welfare effects of customs union and preferential trading arrangements utilising both a very broad welfare criterion and a general equilibrium framework in contrast to the usual partial-equilibrium, cardinalist approach. More specifically, the world output-possibilities associated with a particular customs union or tariff situation are taken to be all the possible output combinations that are consistent with a fixed set of domestic price-ratio relationships among all countries.
