Deck 10: Economic Integration: Customs Unions and Free Trade Areas

Question 1

A trade-diverting customs union results in:

A) trade diversion only
B) trade creation only
C) both trade creation and trade diversion
D) we cannot say

Answer 1

C

Question 2

The formation of a trade-creating customs union where all economic resources of member nations are fully employed before and after the formation of the customs union leads to an:

A) increase in the welfare of member and nonmember nations
B) increase in the welfare of member nations only
C) increase in the welfare of nonmember nations only
D) increase or decrease in the welfare of member and nonmember nations

Answer 2

A

Question 3

A trade-diverting customs union is more likely to lead to trade creation:

A) the lower are the pre-union trade barriers of the member countries
B) the lower are the customs union's barriers on trade with the rest of the world
C) the smaller is the number of countries forming the customs union and the smaller their size
D) the more complementary rather than competitive are the economies of the nations forming the customs union

Answer 3

B

Question 4

The benefit that Mexico is likely to receive from NAFTA:

A) greater export-led growth
B) encouraging the return of flight capital
C) more rapid structural change
D) all of the above

Question 5

The benefit that the United States is likely to receive from NAFTA:

A) increasing competition in product and resource markets
B) greater technical innovation
C) improvements in its terms of trade
D) all of the above

Question 6

A customs union that allows for the free movement of labor and capital among its member nations is called a:

A) preferential trade arrangement
B) free-trade area
C) common market
D) all of the above

Question 7

Which of the following statements is correct?

A) In a customs union, member nations apply a uniform external tariff
B) in a free-trade area, member nations harmonize their monetary and fiscal policies
C) within a customs union there is unrestricted factor movement
D) a customs union is a higher form of economic integration than a common market

Question 8

A customs union is more like to lead to trade creation and increased welfare under the following condition

A) lower pre-union trade barriers
B) lower trade barriers with the rest of the world
C) complementary economies
D) a smaller number of members

Question 9

A trade-creating customs union is one where:

A) lower-cost imports from outside the customs union are replaced by higher-cost imports from a union member
B) some domestic production in a member nation is replaced by lower-cost imports from another member nation
C) trade among members increases but trade with nonmembers decreases
D) trade among members decreases while trade with nonmembers increases

Question 10

The North American Free Trade Agreement (NATFA)is best defined as a

A) free trade area
B) customs union
C) preferential trade arrangement
D) economic union

Question 11

The formation of the EU resulted in:

A) trade creation in industrial and agricultural products
B) trade diversion in industrial and agricultural products
C) trade creation in industrial products and trade diversion in agricultural products
D) trade diversion in industrial products and trade creation in agricultural products

Question 12

One potential outcome from the formation of a regional trade agreement is

A) trade creation
B) trade diversion
C) economies of scale
D) all of the above

Question 13

The theory of customs union is a special case of the theory of:

A) effective protection
B) the second best
C) the product cycle
D) comparative advantage

Question 14

Which is not a dynamic benefit from the formation of a customs union?

A) increased competition
B) economies of scale
C) stimulus to investment
D) trade creation

Question 15

The formation of a free trade area among the countries of Eastern Europe is advocated in order to:

A) restore trade trading
B) retain the traditional trade links that can be justified on market principles
C) reduce the need for structural change
D) none of the above

Question 16

Which is a stumbling block to successful economic integration among groups of developing nations?

A) benefits are not evenly distributed among nations
B) many developing nations are not willing to relinquish part of their newly-acquired sovereignty to a supranational community body, as required for successful economic integration
C) the complementary nature of their economies and competition for the same world markets for their agricultural exports
D) all of the above

Question 17

The European Union currently has

A) 6 members
B) 12 members
C) 15 members
D) 27 members

Question 18

A trade-diverting customs union:

A) increases the welfare of member and nonmember nations
B) reduces the welfare of member and nonmember nations
C) increases the welfare of member nations but reduces that of nonmembers
D) reduces the welfare of nonmembers and may increase or reduce that of members

Question 19

A trade-diverting customs union:

A) increases trade among union members and with nonmember nations
B) reduces trade among union members and with nonmember nations
C) increases trade among members but reduces trade with non-members
D) reduces trade among union members but increases it with nonmembers

Question 20

The following country is not a member of the European Union

A) Switzerland
B) Sweden
C) Ireland
D) Greece

Question 21

Discuss the potential dynamic welfare gains that can result from the formation of a customs union.

Question 22

Discuss the conditions which are more likely to lead to increased welfare with the formation of a customs union.

Question 23

What is the theory of the second best?

Question 24

Which of the following best describes economic integration in Central and Eastern Europe?

A) The Council of Mutual Economic Assistance is the primary current organization.
B) The Baltic states are actively organized into their own trading bloc.
C) The more developed countries of Central Europe are attempting to become EU members.
D) All of Eastern and Central Europe will become part of the EU.

Question 25

Which of the following is not a trading bloc or agreement including some South American countries?

A) MERCOSUR
B) ASEAN
C) FTAA
D) CACM

Question 26

(a)Why did the United States supported economic integration in Europe after World War II? (b)What direct or indirect evidence can you give to conclude that U.S.support for economic integration in Europe did in fact result in the hope-for outcome? (c)What are the major economic disputes between the United States and Europe about these days? What dangers do they create?

Question 27

What is trade diversion?

Question 28

Why do economies that are competitive rather than complementary tend to increase the benefits from customs unions?

Question 29

Discuss the attempts at economic integration in developing countries.Why have these attempts been less successful than in developed countries?

Question 30

Which of the following describes a case in which there are likely to be net benefits from a customs union?

A) The union includes the least-cost producers of the traded goods.
B) There are low barriers to trade prior to the union.
C) The countries are complementary rather than competitive.
D) The countries are a larger geographic distance from each other.