Question 1

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

Accepted Answer

Economic integration involves removing barriers to international trade, payments, and factor mobility in order to increase economic cooperation and efficiency.

Question 2

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 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. 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 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 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 5

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...

Question 6

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 lower prices and increased trade between member countries. The trade-diversion effect represents a welfare loss, as it leads to higher prices and reduced trade with non-member countries.

Question 7

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

With a preferential trading arrangement, a group of countries agrees to reduce tariffs applied to imports from each other, not from all countries of the world.

Question 8

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 9

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

A common market is characterized by the elimination of internal trade barriers (such as tariffs and restrictions on factor movements) between member countries and the adoption of a common external trade policy toward non-member countries. This scenario describes the formation of a common market between the United Kingdom and Italy.

Question 10

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 11

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 situation when a free-trade area leads to an increase in trading activity between member countries as they specialize in their comparative advantage and potentially lower trade barriers. In the given scenario, Mexico and Canada are increasing their imports from each other and specializing in their respective industries, which is an example of trade creation.

Question 12

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 refer to the immediate effects of economic integration, while economies of scale, stimulus to investment, and effects on competition are long-term effects that may take time to develop.

Question 13

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 in the home country is high prior to the formation of the customs union and there are a large number of countries forming the customs union, trade creation tends to more than offset trade diversion. This is because the reduction in tariffs among the member countries leads to an increase in trade among them, which can outweigh any negative effects of trade diversion.

Question 14

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 15

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 variable levy system of the European Union uses tariffs that vary inversely with the world price to protect EU farmers against import competition.

Question 16

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 regional trade agreement leads to increased trade between member countries. In this scenario, if Canada and the United States form a free trade area, it would be expected that trade between them would increase, benefiting both parties. However, if Canada starts importing less steel from the United States and more steel from Japan, it would not be a case of trade creation but rather trade diversion - where trade shifts from a more efficient exporter (the US) to a less efficient exporter (Japan) due to preferential treatment in the free trade agreement.

Question 17

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 a customs union eliminates tariffs and other trade barriers between member countries, allowing for increased trade and efficiency. This leads to imports from low-cost suppliers within the union, rather than outside of it. Therefore, the statement is false.

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 had formed a customs union with Germany, Portugal's welfare would have decreased by $500.

Accepted Answer

Based on the information given in the figure and passage, forming a customs union with Germany would likely benefit Portugal as it would allow them to purchase steel at a lower price and increase their consumer surplus. Thus, Portugal's welfare would not decrease by $500 but rather increase.

Question 19

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 20

The highest stage of economic integration is a monetary union.

Accepted Answer

A monetary union involves the adoption of a common currency and a shared monetary policy among the member states. It requires a high level of economic integration and cooperation among the participating countries.

Quiz 8: Regional Trading Arrangements