Deck 17: Economic Integration

Question 1

If good X from country C faces a 10 percent tariff in country A and a 20 percent tariff in country B, but if A and B have free trade between each other, then A and B are part of which one (and only one) of the following types of groupings?

A) free-trade area
B) customs union
C) common market
D) economic union

Answer 1

A

Question 2

Other things equal, would the formation of a customs union with many members be more likely or less likely to improve welfare for a given member country than the formation of a customs union with only a few members? Why or why not? Other things equal, would the formation of a customs union be more likely or less likely to enhance welfare for a given member country if that country had very high preunion tariffs than if it had very low preunion tariffs? Why or why not?

Answer 2

not answered

Question 3

How could the formation of an economic integration unit among several countries actually result in the countries trading to a greater extent in absolute terms with the outside world than before the union was formed? What factors would you consider in assessing whether this result would be likely to occur? Explain.

Answer 3

not answered

Question 4

If country A forms a customs union with country B, then

A) country B continues to get tariff revenue from country A's exports sent to B.
B) all new trade between countries A and B because of the union is known as "trade Creation."
C) the welfare of countries A and B must necessarily be enhanced, especially if A and B Begin to buy many items from each other that they used to buy from the "outside World."
D) countries A and B may especially benefit from the union if substantial economies of Scale exist in some of the A and B industries.

Question 5

(a) Define "trade creation" in the context of the formation of a customs union. Then, using a demand/supply diagram of a (small) home country for a good that is produced at home and would be imported if there were no tariff, illustrate and explain how the formation of a pure trade-creating customs union can enhance the country's well-being. What factors would be conducive to a greater rather than a smaller gain from the trade creation?
(b) Define "trade diversion" in the context of the formation of a customs union. Then, using a demand/supply diagram of a (small) home country for a good that is both produced at home and imported, illustrate and explain how the movement from a situation of a uniform tariff on imports of the good from all countries to a situation of a trade-diverting customs union with one particular country can affect consumer and producer surplus and government revenue in the home country. Why can we not be sure that welfare in the home country will rise? Under what general conditions would it be likely that this trade-diverting customs union would injure welfare in the home country?

Question 6

Jacob Viner originally envisioned a situation where, in the demand/supply graph of a trade-diverting customs union, the demand curve was vertical and all supply curves (including the supply curve of domestic producers) were horizontal. In this situation, could the trade-diverting customs union ever enhance the home country's (country A's) welfare? Explain.

Question 7

Which of the following is considered to be a positive dynamic effect of integration?

A) economies-of-scale effects
B) reduced customs costs
C) trade diversion
D) increased monopoly power of firms

Question 8

In the diagram in Question #8 above, suppose that country A, from this initial situation Where its tariff is applied to both countries B and C, now forms a customs union with country C. The "net welfare effect" on country A from the formation of this customs union with country C would be __________.

A) areas (a +C) minus area f
B) areas (a + c + e + G) minus area f
C) areas (a + c + d + e + g + h)
D) a gain of areas (a + c + d + e + g + h) minus areas (b + F)

Question 9

Conceptually, what would happen to relative factor prices in labor-abundant country A and capital-abundant country B if the two countries joined together into a customs union? Why? Conceptually, why could the additional step of moving from a customs union to a common market not result in any movement of labor and capital between the two countries? Explain.

Question 10

In general, other things equal, trade creation is more likely to outweigh trade diversion for a home country forming a customs union with partner countries (i) if the total number of countries forming the union is __________, and (ii) if the level of tariffs in the home country prior to the formation of the union is __________.

A) small rather than large; high rather than low
B) small rather than large; low rather than high
C) large rather than small; high rather than low
D) large rather than small; low rather than high

Question 11

In the diagram in Question #8 above, suppose that country A, from this initial situation Where its tariff is applied to both countries B and C, now forms a customs union with Country B. The "net welfare effect" on country A from the formation of this customs Union with country B would be __________.

A) areas (a + b +C) minus area f
B) areas (a +C) minus area f
C) areas (a + C) minus areas (b +F)
D)areas (a + c + d + e + g + h) minus area f

Question 12

If two countries remove all tariffs on each other's products and establish a common set of tariffs against the rest of the world, but take no further steps toward economic integration, these two countries have formed

A) a free-trade area.
B) a customs union.
C) a common market.
D) an economic union.

Question 13

When the European Community began operation in 1958, how many countries belong to this union?

A) 6
B) 15
C) 25
D) 27

Question 14

When the European Community was originally formed, it was determined that the common external tariff on outside world products should be equal to the average of the preunion tariffs of partner countries on the outside world. This rule was adopted so that there would not be a net increase in protection against the outside world. Thus some partners raised tariffs on some products and lowered them on others. See if you can show how this "averaging" rule would complicate the process of making welfare judgments about the likely effects of the original formation of the EC on the member countries.

Question 15

In the diagram in Question #8 above, suppose that country A, from this initial situation where its tariff is applied to both countries B and C, now forms a customs union with Country C. With the formation of this customs union, the amount of imports of good X into country A would be represented by the distance __________.

A) OQ₆
B) Q₁Q₆
C) Q₂Q₅
D) Q₃Q₄

Question 16

In the diagram in Question #8 above, suppose that country A, from this initial situation Where its tariff is applied to both countries B and C, now forms a customs union with Country B. With this customs union in place, imports into country A are distance __________.

A) Q₂Q₅, all of which constitute trade diversion from the non-customs union country.
B) Q₂Q₅, only part of which constitute trade diversion from the non-customs union Country.
C) Q₃Q₄, all of which constitute trade diversion from the non-customs union country.
D) Q₁Q₆, all of which constitute trade diversion from the non-customs union country.

Question 17

In the diagram in Question #8 above, when the tariffs are in place for both countries B And C, the tariff revenue being collected by country A's government consists of__________.

A) area b
B) area f
C) areas (b +F)
D) areas (e + f +G)

Question 18

The following diagram pertains to good X for country A, where D_A is the demand for X By A's consumers, S_A is the supply curve of X from A's home producers, S_B is the Horizontal supply curve of X to country A from country B, S_C is the horizontal supply Curve of X to country A from country C, and S'_B and S'_C are the horizontal supply curves From B and C, respectively, with a tariff in place. With the tariffs in place for both Countries B and C, imports of good X into country A are represented by distance__________.

A) OQ₆
B) Q₁Q₆
C) Q₂Q₅
D) Q₃Q₄

Question 19

Which one of the following sets of countries contains only members of the European Union?

A) France, Spain, Switzerland, United Kingdom
B) Germany, Italy, Portugal, Norway
C) Denmark, Greece, the Netherlands, Russia
D) Belgium, Greece, Italy, Portugal

Question 20

In a production-possibilities/indifference curve diagram, when a (small) country moves From a situation of free trade to a situation of a uniform ad valorem tariff on imports from All trading partners, the ratio of the domestic price of the country's export good to the Domestic price of the country's import good __________.

A) will increase
B) will not change
C) will decrease
D) will increase, not change, or decrease - cannot be determined without more
Information

Question 21

In a production-possibilities/indifference curve diagram, when a (small) country moves From a situation of a uniform ad valorem tariff on all trading partners to a situation of a Trade-diverting customs union with one of its trading partners, the ratio of the domestic Price of the country's export good to the domestic price of the country's import good
__________.

A) will increase
B) will not change
C) will decrease
D) will increase, not change, or decrease - cannot be determined without more
Information

Question 22

As of January 1, 2007, the number of countries belonging to the European Union increased to a total of __________ countries.

A) 6
B) 15
C) 25
D) 27

Question 23

If two countries remove all tariff and nontariff barriers to trade between them, adopt a common external tariff on imports from the outside world, and permit free factor movements between themselves, but take no further steps toward economic integration, this economic coalition that has been formed is a

A) free-trade area.
B) common market..
C) economic union.
D) customs union.

Question 24

The country that claims to have a greater number of economic integration trade Agreements in place than any other country is

A) Chile.
B) the Dominican Republic.
C) Mexico.
D) the United States.

Question 25

In considering "trade creation" and "trade diversion" in the formation of a customs union Between countries and whether the customs union enhances welfare in a home country Joining the union, two general conclusions that seem valid are that the customs union is More likely to enhance welfare, other things equal, (i) the __________ the initial tariff rates of the home country on imported goods, and (ii) the __________ the demand and supply curves of the affected products in the home country.

A) higher; more elastic
B) higher; less elastic
C) lower; more elastic
D) lower; less elastic

Question 26

To which one of the following agreements or groups is the United States NOT a signatory Or member?

A) APEC
B) CAFTA-DR
C) MERCOSUR
D) NAFTA

Question 27

In a production-possibilities/indifference curve diagram depicting the movement of a Country from a situation of a uniform tariff against all trading partners to a situation of a Customs union with one trading partner,

A) the country must necessarily move to a higher indifference curve after the formation Of the customs union.
B) the country must necessarily move to a lower indifference curve after the formation of The customs union.
C) home production of the country's export good will increase and home production of The country's import good will also increase after the formation of the customs Union.
D) home production of the country's export good will increase and home production of The country's import good will decrease after the formation of the customs union.

Question 28

In considering "trade creation" and "trade diversion" in the formation of a customs union Between countries and whether the customs union enhances welfare in a home country Joining the union, two general conclusions that seem valid are that the customs union is Less likely to enhance welfare, other things equal, (i) if the union contains a __________ Number of countries and (ii) if costs of production in the partner countries in the case of Trade diversion differ __________ from costs of production in the outside world (the non-
Member countries).

A) large rather than a small; greatly
B) large rather than small; only slightly
C) small rather than a large; greatly
D) small rather than a large; only slightly