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

D

Question 2

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

Answer 2

C

Question 3

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

Answer 3

C

Question 4

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

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

Question 5

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 6

Customs union theory reasons that the formation of a customs union will $\underline { \text { decrease } }$ 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 7

When products from high-cost suppliers within a customs union replace imports from a low-cost nation that is $\underline { \text { not } }$ a member of the customs union, there exist(s):

A) Dynamic welfare losses
B) Dynamic welfare gains
C) Trade creation
D) Trade diversion

Question 8

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 9

Assume that the formation of a customs union turns out to include the $\underline { \text { lowest-cost } }$ world producer of the product in question. Which effect could $\underline { \text { not } }$ occur for the participating countries?

A) Trade creation-production effect
B) Trade creation-consumption effect
C) Trade diversion
D) Scale economies and competition

Question 10

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 11

A $\underline {\text { static }}$ 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 12

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

A) European Union
B) Benelux
C) Council for Mutual Economic Assistance
D) North American Free Trade Association

Question 13

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

Question 14

Which of the following represents the stage where economic integration is $\underline { \text { least } }$ complete?

A) Free trade area
B) Monetary union
C) Common market
D) Customs union

Question 15

NAFTA is a:

A) Monetary union
B) Free trade area
C) Common market
D) Customs union

Question 16

Which nation is $\underline { \text { not } }$ a member of the North American Free Trade Association?

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

Question 17

A $\underline {\text { dynamic } }$ 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 18

Which of the following represents the stage where economic integration is $\underline { \text { most } }$ complete?

A) Economic union
B) Customs union
C) Monetary union
D) Common market

Question 19

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 20

By 1992 the European Union had become a full-fledged:

A) Economic union
B) Monetary union
C) Common market
D) Fiscal union

Question 21

Which country is $\underline { \text { not } }$ a member of the European Union?

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

Question 22

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 S_G and D_G. 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) 3 calculators from France
B) 5 calculators from France
C) 3 calculators from Germany
D) 5 calculators from Germany

Question 23

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 24

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 25

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 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 S_G and D_G. 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 27

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 in imports from nonmembers

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 S_G and D_G. 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 29

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 30

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 31

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 S_G and D_G. 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) Zero
B) $5
C) $10
D) $15

Question 32

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 S_G and D_G. 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 33

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 34

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 S_G and D_G. 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 35

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

A) 1 calculator from Germany
B) 1 calculator from France
C) 3 calculators from Germany
D) 3 calculators from France

Question 36

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 37

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 38

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

A) Variable levies
B) Export subsidies
C) Import quotas
D) Countertrade

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 S_G and D_G. 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 40

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 S_G and D_G. 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) 3 calculators at a per-unit price of $30
B) 3 calculators at a per-unit price of $40
C) 6 calculators at a per-unit price of $30
D) 6 calculators at a per-unit price of $40

Question 41

In the former Soviet Union, major manufacturing firms were typically:

A) Owned and operated by employee labor unions
B) Owned and operated by the government
C) Privately owned, but operated by the government
D) Publically owned, but operated by the private sector

Question 42

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 43

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 $\underline { \text { except } }$

A) Competition effect
B) Scale-economy effect
C) Protective effect
D) Trade effect

Question 44

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 45

By removing discriminatory government procurement laws within the European Union, member nations hoped to benefit from all of the following $\underline { \text { except } }$

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

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 47

The transition of the former communist countries to market economies would likely result in:

A) The implementation of price ceilings
B) The implementation of price floors
C) Price inflation
D) Price deflation

Question 48

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

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

Question 49

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 50

By joining NAFTA, the United States, Canada, and Mexico would find their short-run welfare decreasing due to the:

A) Economies of scale effect
B) Business investment effect
C) Trade creation effect
D) Trade diversion effect

Question 51

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 52

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 53

The failure of the centrally-planned economies was exemplified by all of the following $\underline { \text { except } }$

A) Interest rates that were below free-market levels
B) Consumer and producer goods of inferior quality
C) Declining rates of economic growth
D) Shortages of essential goods and services

Question 54

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 55

The transition of the former communist countries to market economies requires:

A) Implementation of governmental price controls
B) Privatization of public property
C) Transforming competitive industries into monopolies
D) The sale of private industries to the government

Question 56

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 57

In a centrally-planned economy:

A) Commercial decisions are made by independent buyers and sellers acting in their own interest
B) Market-determined prices are used for allocating scarce resources
C) Prices play a rationing role so that the availability of goods is made consistent with buyer preferences and income
D) Government controls prices and output of goods bought and sold, with minimal recognition given to considerations of efficiency

Question 58

When Mexico became a part of NAFTA, 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 59

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 60

The transition of the former communist countries to market economies requires all of the following $\underline { \text { except } }$

A) Removing domestic price controls
B) Opening economies to international competition
C) Establishing private property rights
D) Terminating the convertibility of their currencies

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 import 25 tons of steel from Germany at a price of $200 per ton.

Question 62

For decades, the Eastern European countries have suffered from

A) Widespread price controls
B) Excessive competition
C) Lack of enforceable property rights
D) Both a and c

Question 63

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 64

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 produces 15 tons of steel, consumes 30 tons of steel, and imports 15 tons of steel.

Question 65

The regional trade block of the former communist countries, which lasted from 1949-1991, was known as the:

A) Eastern European Economic Area
B) Nordic Preferential Trade Agreement
C) Council for Mutual Economic Assistance
D) European Industrial Cooperation Union

Question 66

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 67

The economic reforms of the early 1990s that occurred in the former Soviet Union and Eastern Europe resulted in:

A) The formation of the Council for Mutual Economic Assistance
B) Multinational firms refusing to operate in these nations
C) A movement from centrally-planned economies toward market economies
D) A movement from market economies toward centrally-planned economies

Question 68

The transition from government-controlled prices to market-determined prices in the former communist countries would be expected to result in:

A) Price stability
B) Price deflation
C) Price inflation
D) None of the above

Question 69

A common market

A) Allows the imposition of common external trade barriers against non-members
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 70

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 71

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 72

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 73

According to the theory of optimum currency areas, a currency area has the $\underline { \text { least } }$ 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 74

The former communist countries included all of the following $\underline { \text { except } }$

A) East Germany
B) Soviet Union
C) Austria
D) Poland

Question 75

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. If Portugal forms a customs union with France, the resulting trade-creation effect equals $500.

Question 76

World welfare under a customs union

A) Increases due to a trade creation effect
B) Decreases due to a trade diversion effect
C) Depends on the relative strength of the trade creation effect and the trade diversion effect
D) All of the above

Question 77

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. If Portugal levies a 100 percent nondiscriminatory tariff on its steel imports, it will purchase 5 tons of steel from France at a price of $500 per ton.

Question 78

A main $\underline { \text { disadvantage } }$ 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 79

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 80

The gains from having an optimum currency include

A) Price differentiation
B) Lower competition
C) Lower transaction costs
D) Both b and c