Question 1

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. Under the variable levy system, if the world price is high, the tariff is low and if the world price is low, the tariff is high, thus protecting EU farmers from imports.

Question 2

Trade creation would occur if Canada and the United States form a free-trade area,and 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 increased trade between member countries, resulting in lower prices and increased economic efficiency. In the given scenario, if Canada imports less steel from the US and more from Japan, it would not be considered trade creation between Canada and the US, as the trade between them is decreasing.

Question 3

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

Accepted Answer

Economic integration refers to the gradual process of removing restrictions on trade, payments, and factor mobility between countries in order to enhance economic cooperation and promote economic growth. This can include measures such as reducing tariffs and trade barriers, harmonizing regulations and standards, and encouraging foreign investment and capital flows. Economic integration can take different forms, from free trade agreements to customs unions, common markets, and economic and monetary unions.

Question 4

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 in this case would be zero since the world price is not influenced by Portugal and France would only supply steel at a higher price than Germany.

Question 5

For countries forming a customs union,the trade-creation effect represents a welfare loss and the trade-diversion effect represents a welfare gain.

Accepted Answer

The trade-creation effect represents a welfare gain as it leads to increased trade between member countries, lowering prices and providing consumers with more choice. The trade-diversion effect represents a welfare loss as it redirects trade away from more efficient non-member countries, potentially leading to higher prices and less choice for consumers.

Question 6

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 7

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

This is because with high tariffs, the home country is likely to be importing more from non-member countries, which can now be sourced from within the customs union at lower prices. Additionally, with a large number of countries forming the customs union, the size of the market can increase, leading to greater economies of scale and therefore lower costs of production for member countries. Both of these factors contribute to trade creation outweighing trade diversion.

Question 8

In the short run,Mexico would realize overall welfare gains from becoming a member of the North American Free Trade Agreement if the resulting diseconomies of scale effect more than offset the competition effect.

Accepted Answer

The answer of In the short run,Mexico would realize overall...

Question 9

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 10

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 11

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 12

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 typically involves a group of countries agreeing to reduce tariffs applied to imports from each other, while maintaining tariffs on imports from non-member countries.

Question 13

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 refers to the increased trade and production within a free-trade area due to specialization based on comparative advantage. In this scenario, both Mexico and Canada are specializing in industries where they have a comparative advantage, which leads to increased trade between the two countries.

Question 14

The highest stage of economic integration is a monetary union.

Accepted Answer

A monetary union is considered the highest stage of economic integration. This is where a group of countries share a single currency and central bank, facilitating both trade and economic coordination among member states. Examples of monetary unions include the Eurozone in Europe and the Eastern Caribbean Currency Union in the Caribbean.

Question 15

Trade creation occurs when imports from a low-cost supplier outside of a customs union are replaced by purchases from a higher-cost supplier within the union.

Accepted Answer

Trade creation occurs when imports from a high-cost supplier outside of a customs union are replaced by purchases from a low-cost supplier within the union, leading to lower prices for consumers and increased efficiency in production.

Question 16

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

Accepted Answer

This describes the formation of a common market, where member countries eliminate trade barriers and restrictions on factor movements between them, while also implementing a uniform system of import restrictions against non-member countries.

Question 17

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 18

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 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

If Portugal had formed a customs union with Germany, it would have resulted in a higher domestic price for steel due to the elimination of tariffs on German steel imports. This would have led to a decrease in consumer surplus and increase in producer surplus, resulting in a net welfare loss for Portugal. However, the exact amount of welfare loss cannot be determined from the information given in the question.

Question 20

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 indeed the short run effects of economic integration, while economies of scale, stimulus to investment, and effects on competition refer to the long run effects.

Quiz 8: Regional Trading Arrangements