59. 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
60. The transition of the former communist countries to market economies requires all of the following
except:
a.
Removing domestic price controls
b.
Opening economies to international competition
c.
Establishing private property rights
d.
Terminating the convertibility of their currencies
61. The former communist countries included all of the following except:
a.
East Germany
b.
Soviet Union
c.
Austria
d.
Poland
62. 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
63. 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
64. 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
65. 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
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
67. As of 2002, members of the European Monetary Union agreed to replace their currencies with the:
a.
mark
b.
dollar
c.
franc
d.
euro
68. 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
69. 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
70. 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
71. 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
72. 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
73. The gains from having an optimum currency include
a.
Price differentiation
b.
Lower competition
c.
Lower transaction costs
d.
Both b and c
74. 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
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
75. 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
76. 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
TRUE/FALSE
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
1. Consider Figure 8.2. With free trade, Portugal will import 25 tons of steel from Germany at a price of
$200 per ton.
2. Consider Figure 8.2. With free trade, Portugal produces 15 tons of steel, consumes 30 tons of steel,
and imports 15 tons of steel.
3. 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.
4. Consider Figure 8.2. If Portugal forms a customs union with France, the resulting trade-creation effect
equals $500.
5. Consider Figure 8.2. If Portugal forms a customs union with France, the resulting trade-diversion
effect equals $400.
6. Consider Figure 8.2. As a result of a customs union formed with France, Portugal’s overall welfare
rises by $900.
7. Consider Figure 8.2. If Portugal had formed a customs union with Germany, Portugal’s welfare would
have decreased by $500.
8. The European Union protects its agricultural producers from import competition by the use of tariff
rates that vary directly with world prices.
9. Under the variable levy system of the European Union, EU farmers are protected against import
competition by tariffs that vary inversely with the world price.
10. Trade creation tends to more than offset trade diversion for a home country forming a customs union
with partner countries when: (1) the tariff rate in the home country is high prior to the formation of the
customs union; (2) there are a large number of countries forming the customs union.
11. If Chile and Mexico form a free-trade agreement, the welfare of the two countries will necessarily
increase.
12. If Chile and Mexico abolish all tariffs on each other’s products while maintaining their own tariffs
against other countries, these two countries have formed a customs union.
13. With a preferential trading arrangement, a group of countries agrees to unilaterally reduce tariffs
applied to imports from all countries of the world.
14. Economic integration is the process of eliminating restrictions on international trade, payments, and
factor mobility.
15. When a group of countries establish a free-trade area, they achieve the highest stage of economic
integration.
16. A free-trade area is an association of trading countries whose members agree to remove all trade
restrictions among themselves, while each member country imposes identical trade restrictions against
nonmember countries.
17. If the United Kingdom and Italy eliminate all tariffs on each other’s goods and all restrictions to factor
movements between them, and implement a uniform system of import restrictions against the rest of
the world, these countries have formed a common market.
18. The highest stage of economic integration is a monetary union.
19. Trade creation would occur if Canada and the United States form a free-trade area, and Canadians then
import less steel from the United States while importing more steel from Japan.
20. Suppose that Mexico and Canada form a free-trade area. The Mexicans then decrease refrigerator
manufacturing and increase imports of refrigerators from Canada, while the Canadians decrease auto
manufacturing and import more autos from Mexico. This is an example of trade creation.
21. Trade creation and trade diversion refer to the short run (static) effects of economic integration while
economies of scale, stimulus to investment, and effects on competition refer to the long run (dynamic)
effects.
22. For countries forming a customs union, the trade-creation effect represents a welfare loss and the
trade-diversion effect represents a welfare gain.
23. In the short run, Mexico would realize overall welfare gains from becoming a member of the North
American Free Trade Agreement if the resulting diseconomies of scale effect more than offset the
competition effect.
24. Trade creation occurs when imports from a low-cost supplier outside of a customs union are replaced
by purchases from a higher-cost supplier within the union.
25. If a customs union includes the low-cost supplier of the world, there would be no adverse
trade-diversion effect that would counteract the positive trade-creation effect.
26. The potential for trade diversion is smaller when a custom union’s external tariff is lower rather than
higher.
27. If a customs union included all of the countries in the world, there could exist only trade creation, not
trade diversion.
28. The larger the size and the greater the number of countries in a customs union, the greater will be the
trade-diversion effect.
29. Over the long run, the formation of a customs union may yield welfare gains due to economies of
scale, greater competition, and stimulus to investment.
30. By the mid-1990s, the European Union had essentially achieved the common market stage of
economic integration.
31. At the Maastricht Summit of 1991, members of the European Union expressed the goal of achieving
the common market stage of economic integration.
32. To protect its farmers from foreign competition, the European Union has utilized variable import
levies and export subsidies.
33. To protect its farmers from imports of agricultural goods, the European Union has implemented tariff
rates that vary directly with world prices.
34. As of 1992, the European Union had achieved the monetary union stage of economic integration.
35. The Maastricht Treaty of 1991 established a blueprint for economic union and monetary union for
European Union members.
36. It is generally agreed that completing the common market stage of integration for the European Union
contributed to overall welfare losses due to trade diversion exceeding trade creation.
37. Government procurement liberalization permits a country to realize cost savings resulting from the
trade effect, competition effect, and economies-of-scale effect.
38. During the 1980s and 1990s, the United States negotiated free-trade agreements with Israel, Mexico,
and Canada.
39. Forming a free-trade agreement with the United States provided Canadian producers a danger and an
opportunity. The danger was that U.S. producers might be more price competitive than Canadian
producers; the opportunity was that longer production runs for Canadian producers, made possible by a
free-trade agreement, would result in cost reductions due to economies of scale.
40. Some trade creation was expected to occur as a result of the U.S.-Canada free-trade agreement, since
Canadian exports to the United States and U.S. exports to Canada were expected to expand at the
expense of imports from Germany and Japan that faced trade restrictions.
41. Negotiating the North American Free Trade Agreement was relatively easy since it involved meshing
two large industrial countries with a developing country.
42. Critics of the North American Free Trade Agreement maintained that it would result in manufacturing
firms fleeing Mexico’s stringent pollution-control policies and relocating in the United States and
Canada.
43. U.S. labor unions argued against the North American Free Trade Agreement on the grounds that it
would result in U.S. companies relocating in Mexico in order to take advantage of lower wage rates.
44. The North American Free Trade Agreement was expected to provide proportionately smaller benefits
to Mexico than to the United States or Canada.
45. In the former Soviet Union, production of capital goods was determined by the free market while
consumer-goods production was determined by central planning.
46. The former Soviet Union was characterized by central economic planning and public ownership of
manufacturing enterprises.
47. Pricing of consumer goods in the former Soviet Union was typically regulated by price ceilings which
led to shortages.
48. The transition of the former Soviet Union from a planned economy to a market economy would
require the elimination of price controls, the privatization of public property, and the promotion of
business competition.
49. From the 1940s to the 1980s, the former communist countries remained isolated from the world
economy, primarily due to different tariff systems among the former communist countries.
50. A political dilemma facing the former communist countries in the 1990s was that the transition from a
centrally-planned economy to a market economy would result in short-run costs but long-run benefits.
SHORT ANSWER
1. What is meant by economic integration?
2. What factors influence the extent of trade creation and trade diversion?
ESSAY
1. Explain the theory of optimum currency areas.
2. Concerning transition economies, what do the advocates of shock therapy propose?