Question 1

Suppose that Mexico and Canada form a free trade area.The Mexicans then decrease refrigerator manufacturing and increase imports of refrigerators from Canada, while the Canadians decrease auto manufacturing and import more autos from Mexico.This is an example of trade creation.

Accepted Answer

Trade creation occurs when a free trade area leads to increased trade between member countries, often through a shift in production patterns in favor of more efficient producers within the area. The scenario described in the question represents a shift in production patterns and increased trade between Mexico and Canada, which is an example of trade creation.

Question 2

The highest stage of economic integration is a monetary union.

Accepted Answer

A monetary union involves a shared currency and a coordinated monetary policy among member countries, which represents the highest level of economic integration.

Question 3

The figure below depicts the steel market for Portugal, a small nation that is unable to affect the world price. Assume that Germany and France can supply steel to Portugal at a price of $200 and $300, respectively.

Figure 8.2. Portugal's Steel Market

-Consider Figure 8.2.With free trade, Portugal produces 15 tons of steel, consumes 30 tons of steel, and imports 15 tons of steel.

Accepted Answer

The answer of The figure below depicts the steel market...

Question 4

If Chile and Mexico form a free trade agreement, the welfare of the two countries will necessarily increase.

Accepted Answer

While a free trade agreement can lead to increased trade, efficiency, and economic growth, it does not guarantee an increase in welfare for both countries. The actual impact depends on various factors such as the structure of the economies, the terms of the agreement, and how gains are distributed within each country.

Question 5

The figure below depicts the steel market for Portugal, a small nation that is unable to affect the world price. Assume that Germany and France can supply steel to Portugal at a price of $200 and $300, respectively.

Figure 8.2. Portugal's Steel Market

-Consider Figure 8.2.As a result of a customs union formed with France, Portugal's overall welfare rises by $900.

Accepted Answer

The overall welfare impact of a customs union on a country like Portugal depends on various factors such as the structure of tariffs before and after the union, the trade volumes, and the changes in terms of trade. Without specific details on these factors, it's not possible to definitively state the impact on Portugal's welfare.

Question 6

Trade creation and trade diversion refer to the short-run (static) effects of economic integration, while economies of scale, stimulus to investment, and effects on competition refer to the long-run (dynamic) effects.

Accepted Answer

Trade creation and trade diversion are short-run effects, while economies of scale, stimulus to investment, and effects on competition are long-run effects of economic integration.

Question 7

The figure below depicts the steel market for Portugal, a small nation that is unable to affect the world price. Assume that Germany and France can supply steel to Portugal at a price of $200 and $300, respectively.

Figure 8.2. Portugal's Steel Market

-Consider Figure 8.2.If Portugal forms a customs union with France, the resulting trade diversion effect equals $400.

Accepted Answer

The trade diversion effect from forming a customs union depends on the difference in cost between the goods imported from the most efficient producer outside the union and the less efficient producer within the union. Without specific details on costs, tariffs, or the efficiency of producers, it's not possible to determine the exact value of the trade diversion effect.

Question 8

Economic integration is the process of eliminating restrictions on international trade, payments, and factor mobility.

Accepted Answer

Economic integration aims to remove barriers to free trade, payments and factor mobility, leading to greater economic cooperation and interdependence between countries.

Question 9

When a group of countries establish a free trade area, they achieve the highest stage of economic integration.

Accepted Answer

The highest stage of economic integration is a common market, not a free trade area. A common market not only eliminates trade barriers but also allows for the free movement of factors of production (such as labor and capital) among member countries.

Question 10

A free trade area is an association of trading countries whose members agree to remove all trade restrictions among themselves, while each member country imposes identical trade restrictions against nonmember countries.

Accepted Answer

A free trade area involves the removal of trade barriers among member countries, but each member retains its own trade policies and tariffs towards non-member countries, which do not have to be identical.

Question 11

The figure below depicts the steel market for Portugal, a small nation that is unable to affect the world price. Assume that Germany and France can supply steel to Portugal at a price of $200 and $300, respectively.

Figure 8.2. Portugal's Steel Market

-Consider Figure 8.2.If Portugal levies a 100 percent nondiscriminatory tariff on its steel imports, it will purchase 5 tons of steel from France at a price of $500 per ton.

Accepted Answer

If Portugal levies a 100 percent nondiscriminatory tariff on its steel imports, the price of steel from France will increase to $1000 per ton, making it more expensive than the price of steel from Brazil at $800 per ton. Therefore, Portugal will likely purchase 5 tons of steel from Brazil instead of France.

Question 12

The European Union protects its agricultural producers from import competition by the use of tariff rates that vary directly with world prices.

Accepted Answer

The answer of The European Union protects its agricultural producers...

Question 13

Under the variable levy system of the European Union, EU farmers are protected against import competition by tariffs that vary inversely with the world price.

Accepted Answer

The statement is true. However, the question is about Portugal's steel market and the following sentence discusses EU farmers, which is not relevant.

Question 14

Trade creation would occur if Canada and the United States form a free trade area and the Canadians then import less steel from the United States while importing more steel from Japan.

Accepted Answer

Trade creation occurs when a free trade area leads to an increase in trade between member countries due to lower trade barriers. In the scenario described, if Canada imports less steel from the US and imports more from Japan, this would result in trade diversion as there is a shift from more efficient US producers to less efficient Japanese producers.

Question 15

If the United Kingdom and Italy eliminate all tariffs on each other's goods and all restrictions to factor movements between them and if they implement a uniform system of import restrictions against the rest of the world, these countries have formed a common market.

Accepted Answer

A common market is defined as a group of countries that have eliminated all tariffs and restrictions on factor movements between them and have implemented a common system of import restrictions against the rest of the world. Therefore, if the United Kingdom and Italy eliminate all tariffs and restrictions between them and implement a common system of import restrictions against the rest of the world, they will have formed a common market.

Question 16

If Chile and Mexico abolish all tariffs on each other's products while maintaining their own tariffs against other countries, these two countries have formed a customs union.

Accepted Answer

Chile and Mexico would have formed a free trade area, not a customs union. A customs union requires a common external tariff on imports from non-member countries, which is not mentioned in the scenario.

Question 17

With a preferential trading arrangement, a group of countries agrees to unilaterally reduce tariffs applied to imports from all countries of the world.

Accepted Answer

A preferential trading arrangement involves countries agreeing to lower tariffs for each other, not for all countries worldwide. It's a selective agreement among participating nations.

Question 18

The figure below depicts the steel market for Portugal, a small nation that is unable to affect the world price. Assume that Germany and France can supply steel to Portugal at a price of $200 and $300, respectively.

Figure 8.2. Portugal's Steel Market

-Consider Figure 8.2.If Portugal forms a customs union with France, the resulting trade creation effect equals $500.

Accepted Answer

The trade creation effect measures the increase in trade between the countries in a customs union due to the elimination of trade barriers. In this case, the increase in trade between Portugal and France would result in a $500 gain in Portugal's steel market, indicating a positive trade creation effect.

Question 19

The figure below depicts the steel market for Portugal, a small nation that is unable to affect the world price. Assume that Germany and France can supply steel to Portugal at a price of $200 and $300, respectively.

Figure 8.2. Portugal's Steel Market

-Consider Figure 8.2.If Portugal had formed a customs union with Germany, Portugal's welfare would have decreased by $500.

Accepted Answer

In the context of international trade theory, forming a customs union typically leads to trade creation and trade diversion. While it's difficult to assess the specific impact without seeing "Figure 8.2," generally, forming a customs union can increase a country's welfare by providing access to a larger market and more efficient production from partner countries. The statement oversimplifies the complex effects of forming a customs union, which can include both welfare gains and losses, depending on various factors such as the structure of tariffs, the nature of goods involved, and the relative sizes and economic conditions of the countries involved.

Question 20

Trade creation tends to more than offset trade diversion for a home country forming a customs union with partner countries when: (1) the tariff rate in the home country is high prior to the formation of the customs union; (2) there are a large number of countries forming the customs union.

Accepted Answer

When the tariff rate is high prior to the formation of the customs union and there are a large number of countries forming the customs union, the trade creation effect is likely to be larger than the trade diversion effect. Therefore, the statement is true.

Quiz 8: Regional Trading Arrangements

Suppose that Mexico and Canada form a free trade area.The Mexicans then decrease refrigerator manufacturing and increase imports of refrigerators from Canada, while the Canadians decrease auto manufacturing and import more autos from Mexico.This is an example of trade creation.

The highest stage of economic integration is a monetary union.

If Chile and Mexico form a free trade agreement, the welfare of the two countries will necessarily increase.

Trade creation and trade diversion refer to the short-run (static) effects of economic integration, while economies of scale, stimulus to investment, and effects on competition refer to the long-run (dynamic) effects.

Economic integration is the process of eliminating restrictions on international trade, payments, and factor mobility.

When a group of countries establish a free trade area, they achieve the highest stage of economic integration.

A free trade area is an association of trading countries whose members agree to remove all trade restrictions among themselves, while each member country imposes identical trade restrictions against nonmember countries.

The European Union protects its agricultural producers from import competition by the use of tariff rates that vary directly with world prices.

Under the variable levy system of the European Union, EU farmers are protected against import competition by tariffs that vary inversely with the world price.

Trade creation would occur if Canada and the United States form a free trade area and the Canadians then import less steel from the United States while importing more steel from Japan.

If the United Kingdom and Italy eliminate all tariffs on each other's goods and all restrictions to factor movements between them and if they implement a uniform system of import restrictions against the rest of the world, these countries have formed a common market.

If Chile and Mexico abolish all tariffs on each other's products while maintaining their own tariffs against other countries, these two countries have formed a customs union.

With a preferential trading arrangement, a group of countries agrees to unilaterally reduce tariffs applied to imports from all countries of the world.

Trade creation tends to more than offset trade diversion for a home country forming a customs union with partner countries when: (1) the tariff rate in the home country is high prior to the formation of the customs union; (2) there are a large number of countries forming the customs union.