Trade diversion may be such that the combined welfare of two
Nations in the agreement actually ____ because of ____, not
Completely offset by the _____.
A)falls; loss of tariff revenue for the importing nation; gain in the exporting nation's producer surplus
B)rises; gains from trade; loss of jobs in the importing industry
C)rises; gain in tariff revenue; gain in jobs
D)remains the same; loss of tariff revenue; gains from product variety

Question

Quizplus · Accepted Answer

Trade diversion occurs when a free trade agreement results in the redirection of trade from a more efficient supplier outside the group to a less efficient supplier within the group, leading to a net welfare loss for the participating countries. In this case, the combined welfare of the two nations falls because the loss of tariff revenue for the importing nation is not completely offset by the gain in the exporting nation's producer surplus. Option B, C, and D are incorrect because they do not address the concept of trade diversion and do not accurately describe the impact on welfare.

Trade Diversion May Be Such That the Combined Welfare of Two