Suppose country X currently does not produce widgets. Instead, it imports widgets from country Z. Then country X establishes a regional trade agreement with country Y. Following the formation of the regional trade agreement, it imports widgets from country Y. What has occurred?
A) There is trade diversion and a welfare loss for country X.
B) There is trade creation and a welfare loss for country Y.
C) There is trade diversion and a welfare gain for country X.
D) There is trade creation and a welfare gain for country Y.

Question

Quizplus · Accepted Answer

Trade diversion occurs when a country shifts its import source from a more efficient producer outside a trade agreement to a less efficient one within the agreement, leading to a potential welfare loss.

Suppose Country X Currently Does Not Produce Widgets