Suppose that Mexico and Canada form a free-trade area.Mexicans then decrease auto manufacturing and increase imports of autos from Canada,while the Canadians decrease computer production and import more computers from Mexico.This is an example of:
A) Trade diversion
B) Trade creation
C) Trade destruction
D) Trade exhaustion

Question

Quizplus · Accepted Answer

This is an example of trade creation because the formation of the free-trade area allows for increased specialization and trade between these two countries. As a result, the two countries are each able to focus on producing the goods that they have a comparative advantage in, and trade with each other to obtain the goods that they do not. This leads to greater efficiency and increased economic welfare for both countries.

Suppose That Mexico and Canada Form a Free-Trade Area