Suppose the countries of Iceland and Norway set up a free trade area, eliminating all trade barriers between themselves but maintaining tariffs on imports from the rest of the world. Now, Iceland begins to import wool from Norway. However, Iceland had previously been importing wool from England, which produced wool more cheaply than both Iceland and Norway. What is this an example of?

Question

Quizplus · Accepted Answer

This is an example of trade diversion, where trade shifts from a more efficient exporter (England) to a less efficient one (Norway) due to the formation of a free trade area.

Suppose the Countries of Iceland and Norway Set Up a Free