Question 1

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 2

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. Tariffs applied to imports from non-member countries may or may not be reduced.

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

Accepted Answer

The trade-diversion effect is the loss of economic welfare that results from a member of a customs union purchasing goods from a higher-cost producer within the union instead of from a lower-cost producer outside the union. In the given figure, if Portugal forms a customs union with France, it will import steel from France instead of Germany, resulting in a higher price of $300 instead of $200. This represents a trade-diversion effect of $100 ($300-$200), not $400. Therefore, the statement is false.

Question 4

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

Accepted Answer

Economic integration refers to the process of promoting and facilitating the flow of goods, services, capital, and labor between countries by reducing or eliminating trade barriers such as tariffs, quotas, and other restrictions. This is achieved through various forms of trade agreements such as free trade areas, customs unions, common markets, and economic unions.

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 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, there is greater potential for trade diversion, and if there are a large number of countries forming the customs union, there is potential for greater trade creation. Therefore, in these scenarios, trade creation tends to more than offset trade diversion.

Question 7

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

This is an example of trade creation because the free-trade area allows for greater specialization and efficiency, leading to lower costs and increased overall trade.

Question 8

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 accurately describes the variable levy system of the EU.

Question 9

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

The information provided in the given figure does not allow us to determine the impact of forming a customs union with Germany on Portugal's welfare.

Question 10

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

In the short run, welfare gains from joining NAFTA would typically arise if the competition effect outweighs any diseconomies of scale, not the other way around.

Question 11

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 of a customs union represents a welfare gain as it leads to increased trade flows between member countries, resulting in lower prices and greater consumer choice. The trade-diversion effect, on the other hand, represents a welfare loss as it leads to a shift in trade from more efficient non-member suppliers to less efficient member suppliers, resulting in higher prices and reduced consumer choice.

Question 12

The highest stage of economic integration is a monetary union.

Accepted Answer

A monetary union involves a single currency and a centralized monetary policy for all member countries, which is the highest level of economic integration.

Question 13

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

This statement correctly distinguishes between the short-term effects of trade creation and diversion and the long-term effects of economies of scale, investment, and competition. Trade creation occurs when economic integration leads to increased trade between member countries, while trade diversion occurs when integration diverts trade away from more efficient non-member countries. These effects are generally considered to be short-term and static. In contrast, the long-term and dynamic effects of integration include economies of scale, which allow businesses to reduce their costs through increased production, stimulus to investment, which can lead to new business opportunities and job creation, and increased competition, which can drive innovation and efficiency in the marketplace.

Question 14

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 15

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 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 statement is describing the formation of a common market, which involves the elimination of tariffs and restrictions between member countries while implementing a uniform system of import restrictions for countries outside of the market. Therefore, if the UK and Italy were to do this, they would indeed form a common market.

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

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 agreement leads to an increase in trade between member countries. In this scenario, if Canada imports less steel from the United States and more from Japan, it does not create trade between Canada and the United States, but rather displaces it. Therefore, trade creation does not occur.

Question 19

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 20

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.

Quiz 7: Trade Policies for the Developing Nations