Trade diversion may be such that the combined welfare of two nations in the agreement actually _____ because _____ are not completely offset by the _____.

Question

Quizplus · Accepted Answer

Trade diversion can occur when a regional trade agreement diverts trade from a more efficient producer outside the agreement to a less efficient producer inside the agreement. As a result, the combined welfare of the two nations involved in the agreement may fall. In this case, the losses of tariff revenue for the importing nation are not completely offset by the gains in the exporting nation's producer surplus. Therefore, option A is the correct answer.

Trade Diversion May Be Such That the Combined Welfare of Two