Trade diversion reduces worldwide efficiency,because:

Question

Quizplus · Accepted Answer

Trade diversion occurs when free trade agreements cause trade to shift from a more efficient supplier outside the free trade area to a less efficient supplier within the area. This shifts production away from the country with the comparative advantage and reduces overall efficiency. Therefore, option B is the best choice. Option A is incorrect because production would only be diverted to the country with the comparative advantage if it was already the most efficient supplier. Option C is incorrect because trade diversion is caused by the free trade agreement itself, not by trade restrictions. Option D is incorrect because consumption is not diverted, only production. Option E may be a secondary effect of trade diversion but is not the primary cause of reduced efficiency.

Trade Diversion Reduces Worldwide Efficiency,because