Deck 8: Regional Trading Arrangements

Question 1

Which economic integration scheme is solely intended to abolish trade restrictions among member countries, while setting up common tariffs against nonmembers?

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

Answer 1

customs union

Question 2

Which of the following represents the stage where economic integration is least complete?

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

Answer 2

free trade area

Question 3

Under the European Union's common agricultural policy, a variable import levy equals the

A) amount by which the EU's support price exceeds the world price.
B) amount by which the world price exceeds the EU's support price.
C) support price of the EU.
D) world price.

Answer 3

amount by which the EU's support price exceeds the world price.

Question 4

Which device has the European Union used to equalize farm-product import prices with politically determined European Union prices, regardless of shifts in world prices?

A) variable levies
B) import quotas
C) import subsidies
D) domestic content regulations

Question 5

Customs union theory reasons that the formation of a customs union will decrease members' real welfare when the

A) trade diversion effect exceeds the trade creation effect.
B) trade production effect exceeds the trade consumption effect.
C) trade consumption effect exceeds the trade production effect.
D) trade creation effect exceeds the trade diversion effect.

Question 6

Assume that the formation of a customs union turns out to include the lowest-cost world producer of the product in question.Which effect could NOT occur for the participating countries?

A) trade creation-production effect
B) trade creation-consumption effect
C) trade diversion
D) scale economies and competition

Question 7

Which of the following organizations is considered a regional trading arrangement?

A) Organization of Petroleum Exporting Countries
B) North Atlantic Treaty Organization
C) Benelux Union
D) International Tin Agreement

Question 8

When products from high-cost suppliers within a customs union replace imports from a low-cost nation that is NOT a member of the customs union, there exist(s)

A) dynamic welfare losses.
B) dynamic welfare gains.
C) trade creation.
D) trade diversion.

Question 9

A static welfare effect resulting from the formation of the European Union would be

A) economies of scale.
B) trade diversion.
C) investment incentives.
D) increased competition.

Question 10

By 1992 the European Union had become a full-fledged

A) economic union.
B) monetary union.
C) common market.
D) fiscal union.

Question 11

The European Union is primarily intended to permit

A) countries to adopt scientific tariffs on imports.
B) an agricultural commodity cartel within the group.
C) the adoption of export tariffs for revenue purposes.
D) free movement of resources and products among member nations.

Question 12

The common agriculture policy of the European Union has supported European farmers via

A) export tariffs and domestic content regulations.
B) variable levies and voluntary export agreements.
C) content regulations and export subsidies.
D) export subsidies and variable levies.

Question 13

Which trade instrument has the European Union used to insulate its producers and consumers of agricultural goods from the impact of changing demand and supply conditions in the rest of the world?

A) domestic content regulations
B) variable import levies
C) voluntary export quotas
D) orderly marketing agreements

Question 14

The North American Free Trade Association is a

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

Question 15

Which organization was founded in 1957 whose objective was to create an economic union among its members?

A) General Agreements on Tariffs and Trade
B) Organization of Economic Cooperation and Development
C) European Union
D) Latin American Free Trade Association

Question 16

A dynamic welfare gain resulting from the formation of the European Union would be

A) trade diversion.
B) trade creation.
C) diseconomies of scale.
D) economies of scale.

Question 17

Which organization of nations permits free trade among its members in industrial goods, while each member maintains freedom in its trade policies toward nonmember countries?

A) European Union
B) Benelux Union
C) North Atlantic Treaty Organization
D) North American Free Trade Association

Question 18

Which of the following represents the stage where economic integration is most complete?

A) economic union
B) customs union
C) monetary union
D) common market

Question 19

Which nation is NOT a member of the North American Free Trade Association?

A) Canada
B) Greenland
C) Mexico
D) United States

Question 20

Which form of economic integration occurs when participating countries abolish tariffs on trade among themselves, establish a common tariff on imports from nonmembers, and permit free movement of capital and labor within the organization?

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

Question 21

Figure 8.1 depicts the supply and demand schedules of calculators for Greece, a "small" country that is unable to affect the world price. Greece's supply and demand schedules of calculators are respectively depicted by SG and DG. Assume that Greece imports calculators from either Germany or France. Suppose Germany is the world's low-cost producer who can supply calculators to Greece at $20 per unit, while France can supply calculators at $30 per unit.

Figure 8.1. Effects of a Customs Union


-Consider Figure 8.1.With free trade, Greece imports

A) three calculators from France.
B) five calculators from France.
C) three calculators from Germany.
D) five calculators from Germany.

Question 22

The implementation of the European Union has

A) made it harder for Americans to compete against the Germans in the British market.
B) made it easier for Americans to compete against the Germans in the British market.
C) made it harder for Americans to compete against the Japanese in the British market.
D) made it easier for Americans to compete against the Japanese in the British market.

Question 23

The European Union has achieved all of the following EXCEPT

A) adopted a common fiscal policy for member nations.
B) established a common system of agricultural price supports.
C) disbanded all tariffs among its member countries.
D) levied common tariffs on products imported from nonmembers.

Question 24

Figure 8.1 depicts the supply and demand schedules of calculators for Greece, a "small" country that is unable to affect the world price. Greece's supply and demand schedules of calculators are respectively depicted by SG and DG. Assume that Greece imports calculators from either Germany or France. Suppose Germany is the world's low-cost producer who can supply calculators to Greece at $20 per unit, while France can supply calculators at $30 per unit.

Figure 8.1. Effects of a Customs Union


-Consider Figure 8.1.The value of the trade creation effect resulting from the Greece/France customs union equals

A) $5.
B) $10.
C) $15.
D) $20.

Question 25

Members of the European Union find that "trade creation" is fostered when their economies are

A) highly competitive.
B) highly noncompetitive.
C) small in economic importance.
D) geographically distant.

Question 26

Figure 8.1 depicts the supply and demand schedules of calculators for Greece, a "small" country that is unable to affect the world price. Greece's supply and demand schedules of calculators are respectively depicted by SG and DG. Assume that Greece imports calculators from either Germany or France. Suppose Germany is the world's low-cost producer who can supply calculators to Greece at $20 per unit, while France can supply calculators at $30 per unit.

Figure 8.1. Effects of a Customs Union


-Consider Figure 8.1.Assume Greece levies a per-unit tariff of $20 on imports from both Germany and France. As a result of the $20 tariff, Greece's consumer surplus falls by

A) $90.
B) $100.
C) $110.
D) $120.

Question 27

Figure 8.1 depicts the supply and demand schedules of calculators for Greece, a "small" country that is unable to affect the world price. Greece's supply and demand schedules of calculators are respectively depicted by SG and DG. Assume that Greece imports calculators from either Germany or France. Suppose Germany is the world's low-cost producer who can supply calculators to Greece at $20 per unit, while France can supply calculators at $30 per unit.

Figure 8.1. Effects of a Customs Union


-According to Figure 8.1, the formation of a Greece/Germany customs union would result in

A) $20 of trade diversion.
B) $40 of trade diversion.
C) $20 of trade creation.
D) $40 of trade creation.

Question 28

Figure 8.1 depicts the supply and demand schedules of calculators for Greece, a "small" country that is unable to affect the world price. Greece's supply and demand schedules of calculators are respectively depicted by SG and DG. Assume that Greece imports calculators from either Germany or France. Suppose Germany is the world's low-cost producer who can supply calculators to Greece at $20 per unit, while France can supply calculators at $30 per unit.

Figure 8.1. Effects of a Customs Union


-Consider Figure 8.1.Assume Greece levies a per-unit tariff of $20 on imports from both Germany and France. The deadweight welfare loss to Greece resulting from the $20 tariff equals

A) $20.
B) $40.
C) $60.
D) $80.

Question 29

Which country is NOT a member of the European Union?

A) Spain
B) Germany
C) France
D) Iceland

Question 30

Under the common agricultural policy, exports of any surplus quantities of European Union produce are encouraged through the usage of

A) variable levies.
B) export subsidies.
C) import quotas.
D) countertrade.

Question 31

In 1989, Canada and the United States agreed to implement a (an) ____ over a ten-year period.

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

Question 32

When the formation of a free trade area results in the reduction of trade with nonmember nations in favor of member countries, _____________ occurs.

A) trade devaluation
B) trade revaluation
C) trade creation
D) trade diversion

Question 33

Figure 8.1 depicts the supply and demand schedules of calculators for Greece, a "small" country that is unable to affect the world price. Greece's supply and demand schedules of calculators are respectively depicted by SG and DG. Assume that Greece imports calculators from either Germany or France. Suppose Germany is the world's low-cost producer who can supply calculators to Greece at $20 per unit, while France can supply calculators at $30 per unit.

Figure 8.1. Effects of a Customs Union


-Consider Figure 8.1.Assume Greece levies a per-unit tariff of $20 on imports from both Germany and France. Greece will import

A) one calculator from Germany.
B) one calculator from France.
C) three calculators from Germany.
D) three calculators from France.

Question 34

The implementation of a common market involves all of the following EXCEPT

A) elimination of trade restrictions among member countries.
B) a common tax system and monetary union.
C) prohibition of restrictions on factor movements.
D) a common tariff levied on imports from nonmembers.

Question 35

When the United States, Canada, and Mexico form a free trade area, and Mexico begins importing a product from Canada rather than from the lowest-cost world producer

A) trade diversion occurs.
B) trade creation occurs.
C) world welfare rises.
D) world welfare falls to zero.

Question 36

Figure 8.1 depicts the supply and demand schedules of calculators for Greece, a "small" country that is unable to affect the world price. Greece's supply and demand schedules of calculators are respectively depicted by SG and DG. Assume that Greece imports calculators from either Germany or France. Suppose Germany is the world's low-cost producer who can supply calculators to Greece at $20 per unit, while France can supply calculators at $30 per unit.

Figure 8.1. Effects of a Customs Union


-Consider Figure 8.1.The value of the trade diversion effect, resulting from the Greece/France customs union, equals

A) $5.
B) $10.
C) $15.
D) $20.

Question 37

Figure 8.1 depicts the supply and demand schedules of calculators for Greece, a "small" country that is unable to affect the world price. Greece's supply and demand schedules of calculators are respectively depicted by SG and DG. Assume that Greece imports calculators from either Germany or France. Suppose Germany is the world's low-cost producer who can supply calculators to Greece at $20 per unit, while France can supply calculators at $30 per unit.

Figure 8.1. Effects of a Customs Union


-Consider Figure 8.1.Comparing the trade creation and trade diversion effects, the impact of the Greece/France customs union on the welfare of Greece is

A) a $5 increase in economic welfare.
B) a $10 increase in economic welfare.
C) a $5 decrease in economic welfare.
D) no change in economic welfare.

Question 38

Figure 8.1 depicts the supply and demand schedules of calculators for Greece, a "small" country that is unable to affect the world price. Greece's supply and demand schedules of calculators are respectively depicted by SG and DG. Assume that Greece imports calculators from either Germany or France. Suppose Germany is the world's low-cost producer who can supply calculators to Greece at $20 per unit, while France can supply calculators at $30 per unit.

Figure 8.1. Effects of a Customs Union


-Consider Figure 8.1.Suppose Greece had formed a customs union with Germany rather than France.The value of the trade diversion effect would be

A) $0.
B) $5.
C) $10.
D) $15.

Question 39

Figure 8.1 depicts the supply and demand schedules of calculators for Greece, a "small" country that is unable to affect the world price. Greece's supply and demand schedules of calculators are respectively depicted by SG and DG. Assume that Greece imports calculators from either Germany or France. Suppose Germany is the world's low-cost producer who can supply calculators to Greece at $20 per unit, while France can supply calculators at $30 per unit.

Figure 8.1. Effects of a Customs Union


-Referring to Figure 8.1, suppose Greece forms a customs union with France.Greece will import

A) three calculators at a per-unit price of $30.
B) three calculators at a per-unit price of $40.
C) six calculators at a per-unit price of $30.
D) six calculators at a per-unit price of $40.

Question 40

The common agricultural policy of the European Union has

A) increased American farm exports to the EU.
B) decreased American farm exports to the EU.
C) lowered the price of American farm exports to the EU.
D) not affected the price of American farm exports to the EU.

Question 41

As new regional trading arrangements are formed, the opportunity cost of remaining outside

A) increases.
B) decreases.
C) either increases or decreases.
D) neither increases nor decreases.

Question 42

Regarding the benefits of regional trade agreements, which of the following is NOT a benefit?

A) Regional trade agreements may help manage immigration flows.
B) Regional trade agreements promote regional security.
C) Regional trade agreements may help lock in policy shifts towards market-oriented reform.
D) Regional trade agreements may promote democracy.

Question 43

If the United States and Canada abolish all tariffs on each other's goods and implement a common tariff on goods imported from other countries, there occurs a (an)

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

Question 44

The North American Free Trade Agreement was expected to benefit __________ the most.

A) Canada
B) Mexico
C) Greenland
D) United States

Question 45

By removing discriminatory government procurement laws within the European Union, member nations hoped to benefit from all of the following EXCEPT

A) EU governments could purchase from the cheapest foreign suppliers.
B) increased competition occurs as domestic firms compete with foreign firms previously shut out of the domestic market.
C) industries are restructured which permits surviving firms to achieve economies of scale.
D) agricultural prices fall as more farmers are allowed to produce their commodities.

Question 46

The World Trade Organization's efforts to promote trade liberalization globally

A) have become easier.
B) have become more difficult.
C) have remained stable.
D) cannot be achieved.

Question 47

Suppose that Mexico and Canada form a free trade area, and Canada begins importing steel from Mexico rather than from Germany.There occurs

A) trade diversion.
B) trade creation.
C) trade destruction.
D) trade exhaustion.

Question 48

Among the benefits that a regional trading arrangement can provide are all of these EXCEPT

A) economies of large-scale production.
B) specialization fostering.
C) attracting foreign investment.
D) a shorter production time.

Question 49

At the Maastricht Summit of 1991, European Union negotiators called for the pursuit of a

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

Question 50

The North American Free Trade Agreement was most strongly opposed by U.S.

A) electronics manufacturers.
B) labor unions.
C) commercial banks.
D) engineering companies.

Question 51

In the United States, the proposed North American Free Trade Agreement was generally supported by

A) labor unions.
B) electronics firms.
C) environmentalists.
D) citrus producers.

Question 52

When Mexico became a part of the North American Free Trade Agreement, along with Canada and the United States, it

A) eliminated tariffs against Canada and the United States but maintained them against nonmembers.
B) eliminated tariffs against Canada, the United States, and all nonmember countries.
C) increased tariffs against Canada, the United States, and all nonmember countries.
D) increased tariffs against Canada and the United States but did not change them against nonmember countries.

Question 53

In the United States, which group was most likely to be hurt by the North American Free Trade Agreement?

A) unskilled labor
B) skilled labor
C) owners of capital equipment
D) owners of financial capital

Question 54

Regarding the interests of a nonmember nation of a regional trading agreement

A) the exporting interests of the nonmember nation outweigh its import competing interests.
B) the import competing interests of the nonmember nation outweigh its exporting interests.
C) the nonmember nation will have a better negotiating position.
D) the nonmember nation has no interest in the regional trading arrangement.

Question 55

By joining the North American Free Trade Agreement, the United States, Canada, and Mexico would find their short-run welfare decreasing because of the

A) economies of scale effect.
B) business investment effect.
C) trade creation effect.
D) trade diversion effect.

Question 56

Suppose that government procurement liberalization results in the U.K.government importing automobiles from Germany, the low-cost EU manufacturer.Cost savings could result from all of the following EXCEPT

A) competition effect.
B) scale-economy effect.
C) protective effect.
D) trade effect.

Question 57

Suppose that steel from Japan faces a 20 percent tariff in France and a 25 percent tariff in Italy, while France and Italy maintain free trade between each other.France and Italy are therefore part of a (an)

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

Question 58

Suppose that the United Kingdom and Italy abolish all tariffs on each other's goods and all restrictions on movements of factors of production between them.They also implement a common protectionist policy toward other countries.This is an example of a (an)

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

Question 59

Suppose that Mexico and Canada form a free trade area.Mexicans then decrease auto manufacturing and increase imports of autos from Canada, while the Canadians decrease computer production and import more computers from Mexico.This is an example of

A) trade diversion.
B) trade creation.
C) trade destruction.
D) trade exhaustion.

Question 60

Smaller nations may seek safe haven trading arrangements with larger nations when future access to that market seems uncertain.This was reason for the formation of

A) WTO.
B) GATT.
C) NAFTA.
D) Council for Mutual Economic Assistance.

Question 61

The figure below depicts the steel market for Portugal, a small nation that is unable to affect the world price. Assume that Germany and France can supply steel to Portugal at a price of $200 and $300, respectively.

Figure 8.2. Portugal's Steel Market


-Consider Figure 8.2.With free trade, Portugal will

A) import 0 tons of steel for Germany and 15 tons of steel from France at $300 per ton.
B) import 25 tons of steel from Germany at $200 per ton and 15 tons of steel from France at $300 per ton.
C) import 15 tons of steel from Germany at $200 per ton and 10 tons of steel from France at $200 per ton.
D) import 25 tons of steel from Germany at $200 per ton and 0 tons from France.

Question 62

American critics of the North American Free Trade Agreement thought that it could

A) cause American workers to migrate to Mexico to find jobs.
B) cause U.S. companies to move to Mexico to benefit from lower labor costs.
C) cause Mexican companies to move to the United States to benefit from higher labor productivity.
D) cause Mexican companies to move to the United States to benefit from higher labor costs.

Question 63

The task of creating an economic union is

A) difficult.
B) relatively easy.
C) similar to creating a customs union.
D) the simplest of all economic integrations.

Question 64

The formation of the European Monetary Union is expected to entail benefits for member countries which include all of the following EXCEPT

A) greater certainty for investors within the EMU.
B) lower costs of transactions within the EMU.
C) independent monetary policies run by the central bank of each member country.
D) enhanced competition among companies in member countries.

Question 65

Regarding a common market, which of the following is true?

A) It permits the free movement of goods and service among nonmembers.
B) It exercises common external trade restrictions against members.
C) It represents a more complete integration of member nations than a customs union.
D) It restricts the movement of factors of production across national borders.

Question 66

Suppose that Canada has domestic firms that could supply its entire market for radios at a price of $50, while U.S.firms could supply radios at $40 and Mexico at $30.Suppose that Canada initially has a 50 percent tariff on imports of radios and then forms a free trade area with Mexico.As a result, Canada realizes

A) trade creation, no trade diversion, and overall welfare gains.
B) trade creation, no trade diversion, and overall welfare losses.
C) trade diversion, no trade creation, and potential overall welfare losses.
D) trade diversion, trade creation, and potential overall welfare gains.

Question 67

The figure below depicts the steel market for Portugal, a small nation that is unable to affect the world price. Assume that Germany and France can supply steel to Portugal at a price of $200 and $300, respectively.

Figure 8.2. Portugal's Steel Market


-Consider Figure 8.2.With free trade, Portugal will

A) produce 10 tons of steel, consume 35 tons of steel, and import 25 tons of steel.
B) produce 15 tons of steel, consume 30 tons of steel, and import 15 tons of steel.
C) produce 0 tons of steel, consume 35 tons of steel, and import 35 tons of steel.
D) produce 15 tons of steel, consume 35 tons of steel, and import 20 tons of steel.

Question 68

The gains from having an optimum currency include

A) price differentiation.
B) lower competition.
C) lower transaction costs.
D) independent monetary policies run by the central bank of each member country.

Question 69

Luxembourg is NOT a member of

A) the European Union.
B) a monetary union.
C) the Benelux Union.
D) NAFTA.

Question 70

The United States serves as an example of

A) a common market.
B) a common union.
C) a monetary union.
D) a free trade area.

Question 71

All of the following are factors mitigating against global trade liberalization EXCEPT

A) regional trading arrangements may limit trade liberalization with outsiders.
B) a small nation might do better entering into a pact with a larger nation rather than competing globally.
C) trading bloc members may not realize economies of scale through global liberalization.
D) trading bloc members prefer competing globally rather than locally.

Question 72

For the United States, the political debate of joining NAFTA was very intense because of Mexico's

A) relatively high wage levels.
B) relatively high levels of environmental enforcement.
C) relatively high standards for protecting workers.
D) relatively low-skilled workers.

Question 73

Suppose that Canada has domestic firms that could supply its entire market for radios at a price of $50, while U.S.firms could supply radios at $40 and Mexico at $30.Suppose that Canada initially has a 50 percent tariff on imports of radios and then forms a free trade area with the United States.As a result, Canada realizes

A) trade creation, no trade diversion, and overall welfare gains.
B) trade creation, no trade diversion, and overall welfare losses.
C) trade diversion, no trade creation, and potential overall welfare losses.
D) trade diversion, trade creation, and potential overall welfare gains.

Question 74

According to the theory of optimum currency areas, a currency area has the least chance for success when

A) countries of the currency area have differing business cycles.
B) workers have a high degree of mobility across borders of the currency area.
C) prices and wages can be adjusted in response to economic disturbances.
D) a single monetary policy affects all member countries in the same manner.

Question 75

World welfare under a customs union

A) increases because of a trade creation effect.
B) increases because of a trade diversion effect.
C) is not affected by the trade creation and the trade diversion effects.
D) decreases because of a trade creation effect.

Question 76

Advocates of the North American Free Trade Agreement hoped that a (an) __________ in Mexican exports would __________ the migration of labor from Mexico to the United States.

A) increase, increase
B) increase, decrease
C) decrease, increase
D) decrease, decrease

Question 77

A common market

A) allows the imposition of common external trade barriers against nonmembers.
B) represents less economic integration than a free trade area.
C) does not permit free movement of goods among member nations.
D) does not allow free movement of factors of production among nations.

Question 78

As of 2002, members of the European Monetary Union agreed to replace their currencies with the

A) mark.
B) dollar.
C) franc.
D) euro.

Question 79

A main disadvantage of the European Monetary Union is that

A) each member country loses the use of monetary policy as to tool to combat recession.
B) there is a high degree of labor mobility among the member countries.
C) prices are highly flexible in response to changing economic conditions.
D) wages are highly flexible in response to changing economic conditions.

Question 80

American critics of the North American Free Trade Agreement thought that it could cause some U.S.companies to move to Mexico to benefit from

A) lenient environment policies of the Mexican government.
B) high wages of Mexican workers.
C) low productivity of Mexican workers.
D) high corporate tax rates of the Mexican government.