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Indicate whether the statement is true or false.
1. All welfare effects of a regional trading agreement are static.
a. True
b. False
2. To protect its farmers from imports of agricultural goods, the European Union has implemented tariff rates that vary
directly with world prices.
a. True
b. False
3. 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.
a. True
b. False
4. At the Maastricht Summit of 1991, members of the European Union expressed the goal of achieving the common
market stage of economic integration.
a. True
b. False
5. For countries forming a customs union, the trade creation effect represents a welfare loss and the trade diversion effect
represents a welfare gain.
a. True
b. False
6. Over the long run, the formation of a customs union may yield welfare gains that are due to economies of scale, greater
competition, and stimulus to investment.
a. True
b. False
7. The highest stage of economic integration is a monetary union.
a. True
b. False
8. 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.
a. True
b. False
9. The North American Free Trade Agreement was expected to provide proportionately smaller benefits to Mexico than to
the United States or Canada.
a. True
b. False
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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
10. Consider Figure 8.2. If Portugal forms a customs union with France, the resulting trade creation effect equals $500.
a. True
b. False
11. When Western European democracies removed trade barriers and began to form the European Community, one of
their hopes was that their economic and financial ties would bind them together so that it would not be in their interest to
go to war again.
a. True
b. False
12. All welfare consequences of a regional trading arrangement are dynamic.
a. True
b. False
13. The European Union protects its agricultural producers from import competition by the use of tariff rates that vary
directly with world prices.
a. True
b. False
14. An optimal currency area is a region in which it is economically preferable to have a single official currency rather
than multiple official currencies.
a. True
b. False
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15. If a customs union included all of the countries in the world, there could exist only trade creation, not trade diversion.
a. True
b. False
16. During the 1980s and 1990s, the United States negotiated free trade agreements with Israel, Mexico, and Canada.
a. True
b. False
17. 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.
a. True
b. False
18. 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.
a. True
b. False
19. The Maastricht Treaty of 1991 established a blueprint for economic union and monetary union for European Union
members.
a. True
b. False
20. Economic integration is the process of eliminating restrictions on international trade, payments, and factor mobility.
a. True
b. False
21. 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.
a. True
b. 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
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22. Consider Figure 8.2. With free trade, Portugal produces 15 tons of steel, consumes 30 tons of steel, and imports 15
tons of steel.
a. True
b. False
23. Consider Figure 8.2. As a result of a customs union formed with France, Portugal’s overall welfare rises by $900.
a. True
b. False
24. Critics of the North American Free Trade Agreement feared that many Americans would migrate to Mexico to find
jobs.
a. True
b. False
25. If the United Kingdom and Italy eliminate all tariffs on each other’s goods and all restrictions to factor movements
between them and if they implement a uniform system of import restrictions against the rest of the world, these countries
have formed a common market.
a. True
b. False
26. 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.
a. True
b. False
27. With a preferential trading arrangement, a group of countries agrees to unilaterally reduce tariffs applied to imports
from all countries of the world.
a. True
b. False
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28. If Chile and Mexico form a free trade agreement, the welfare of the two countries will necessarily increase.
a. True
b. False
29. Within a customs union, broader markets may also promote greater competition among producers.
a. True
b. False
30. Government procurement liberalization permits a country to realize cost savings resulting from the trade effect,
competition effect, and economies-of-scale effect.
a. True
b. False
31. An advantage of the European Monetary Union (Eurozone) is that its member countries have common fiscal policies.
a. True
b. False
32. 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 affect more than offset the competition effect.
a. True
b. False
33. 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.
a. True
b. False
34. Advocates of the North American Free Trade Agreement hoped that a rise in Mexican exports to the United States
would discourage labor migration from Mexico to the United States.
a. True
b. False
35. A free trade area and a customs union differ in the way in which member nations treat imports from nonmember
nations.
a. True
b. False
36. Trade creation would occur if Canada and the United States form a free trade area and the Canadians then import less
steel from the United States while importing more steel from Japan.
a. True
b. False
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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
37. Consider Figure 8.2. If Portugal forms a customs union with France, the resulting trade diversion effect equals $400.
a. True
b. False
38. The European Union has abolished restrictions on agricultural products traded internally.
a. True
b. False
39. The larger the size and the greater the number of countries in a customs union, the greater the trade diversion effect.
a. True
b. False
40. Under the North American Free Trade Agreement, Canada, Mexico, and the United States agreed to adopt free trade
among each other but also to fully harmonize their fiscal and monetary policies.
a. True
b. 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
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41. 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.
a. True
b. False
42. A free trade area is like a customs union EXCEPT its members adopt a common external tariff structure.
a. True
b. False
43. Negotiating the North American Free Trade Agreement was relatively easy since it involved meshing two large
industrial countries with a developing country.
a. True
b. False
44. As of 1992, the European Union had achieved the monetary union stage of economic integration.
a. True
b. False
45. In terms of static economic analysis, if a customs union results in a large amount of trade diversion relative to trade
creation, world welfare declines.
a. True
b. False
46. Following World War II, Western European nations suffered from balance-of-payments deficits that were due to
reconstruction.
a. True
b. False
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47. By the mid-1990s, the European Union had essentially achieved the common market stage of economic integration.
a. True
b. False
48. When a group of countries establish a free trade area, they achieve the highest stage of economic integration.
a. True
b. False
49. 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 that
would be due to economies of scale.
a. True
b. False
50. 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.
a. True
b. False
51. It is generally agreed that completing the common market stage of integration for the European Union contributed to
overall welfare losses that were due to trade diversion exceeding trade creation.
a. True
b. False
52. 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.
a. True
b. False
53. 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.
a. True
b. 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
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54. Consider Figure 8.2. If Portugal had formed a customs union with Germany, Portugal’s welfare would have decreased
by $500.
a. True
b. False
55. To protect its farmers from foreign competition, the European Union has utilized variable import levies and export
subsidies.
a. True
b. False
56. 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.
a. True
b. False
57. A long-run goal of the NAFTA members is to integrate their economies into an economic and monetary union with
common fiscal policies and monetary policies.
a. True
b. False
58. The potential for trade diversion is smaller when a custom union’s external tariff is lower rather than higher.
a. True
b. False
59. Before joining the North American Free Trade Agreement in 1994, Mexico adopted essentially a free trade policy
toward Canada and the United States.
a. True
b. False
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60. The European Union’s variable levy is essentially a sliding-scale tariff applied to imports of agricultural products.
a. True
b. 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
61. Consider Figure 8.2. With free trade, Portugal will import 25 tons of steel from Germany at a price of $200 per ton.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
62. If the United States and Canada implement a regional trading agreement that results in the two countries eliminating
trade barriers between themselves while maintaining separate trade barriers against nonmember countries, they have
formed a
a. common market.
b. customs union.
c. free trade area.
d. economic union.
63. 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.
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d. economic union.
64. The theory of optimal currency areas concludes that for a currency area to have the best chance of success
a. workers in the affected country must be able to work freely in their countries.
b. prices and wages are fixed.
c. countries should have similar business cycles.
d. countries should have different economic structures.
65. Regarding stages of economic integration, a customs union
a. goes beyond a free trade area by including a common external tariff.
b. falls short of a free trade area by excluding a common external tariff.
c. goes beyond a common market by including a common transportation policy.
d. goes beyond a common market by including a common agricultural policy.
66. 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
67. The common agricultural policy of the European Union supports its farmers through a system of
a. variable levies and export subsidies.
b. fixed import tariffs and export subsidies.
c. export subsidies and import quotas.
d. domestic content requirements.
68. 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.
69. 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.
70. 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
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71. 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.
72. 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.
73. 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.
74. 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.
75. 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.
76. 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.
77. In terms of static economic analysis, if a customs union results in a small amount of trade creation relative to trade
diversion, world welfare
a. increases.
b. decreases.
c. either increases or decreases.
d. neither increases nor decreases.
78. In the United States, which group was most likely to be hurt by the North American Free Trade Agreement?
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a. unskilled labor
b. skilled labor
c. owners of capital equipment
d. owners of financial capital
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
79. 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.
80. 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.
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
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81. 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.
82. 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
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
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83. 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.
84. 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.
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
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85. 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.
86. 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.
87. 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.
88. 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.
89. Concerning the stages of economic integration, by the early 1990s, the European Union had essentially reached the
stage of a (an)
a. free trade area.
b. customs union.
c. common market.
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d. economic union.
90. 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.
91. As of 2016, 18 members of the European Union had adopted further economic integration than the other members by
a. abolishing tariff and nontariff barriers to trade among each other.
b. adopting uniform policies on the movement of factors of production.
c. establishing common trade policies against countries that were not members of the EU.
d. implementing a common currency and a common monetary policy.
92. NAFTA is essentially a
a. free trade area.
b. customs union.
c. economic union.
d. monetary union.
93. 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
94. 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.
95. 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.
96. 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.
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97. The North American Free Trade Agreement was expected to benefit __________ the most.
a. Canada
b. Mexico
c. Greenland
d. United States
98. 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.
99. Countries pursuing membership in the European Monetary Union (Eurozone) are supposed to meet “convergence
criteria,” which includes
a. price instability.
b. high long-term interest rates.
c. sound governmental finances.
d. unstable exchange rates.
100. 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
101. 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.
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
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102. 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.
103. Which nation is NOT a member of the North American Free Trade Association?
a. Canada
b. Greenland
c. Mexico
d. United States
104. 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.
105. Regarding stages of economic integration, a free trade area
a. goes beyond a customs union by including a common external tariff.
b. falls short of a customs union by excluding a common external tariff.
c. goes beyond a common market by including a common transportation policy.
d. goes beyond a common market by including a common agricultural policy.
106. If several countries form a regional trading pact that removes tariffs between the members, implements a common
external tariff structure, permits free mobility of factors of production, and integrates fiscal policies, they have formed a
a. customs union.
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b. economic union.
c. free trade area.
d. common market.
107. 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.
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
108. 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.
109. 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.
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110. By 1992 the European Union had become a full-fledged
a. economic union.
b. monetary union.
c. common market.
d. fiscal union.
111. 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.
112. 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
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
113. 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.
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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
114. 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.
115. 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
116. 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.
117. The North American Free Trade Association is a
a. monetary union.
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b. free trade area.
c. common market.
d. customs union.
118. Relative to a regional trade agreement, a multilateral trade agreement may be more beneficial to global welfare in
that it entails
a. less trade creation.
b. less trade diversion.
c. more trade diversion.
d. more trade consumption.
119. 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
120. 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.
121. 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.
122. 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.
123. 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.
124. The implementation of a common market involves all of the following EXCEPT
a. elimination of trade restrictions among member countries.
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b. a common tax system and monetary union.
c. prohibition of restrictions on factor movements.
d. a common tariff levied on imports from nonmembers.
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
125. 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.
126. 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
127. 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.
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128. 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.
129. 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.
130. 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.
131. 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.
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
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132. 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.
133. Luxembourg is NOT a member of
a. the European Union.
b. a monetary union.
c. the Benelux Union.
d. NAFTA.
134. 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.
135. 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.
136. 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
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d. domestic content regulations
137. 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.
138. In terms of static economic analysis, if a customs union results in a large amount of trade creation relative to trade
diversion, world welfare
a. increases.
b. decreases.
c. either increases or decreases.
d. neither increases nor decreases.
139. 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.
140. 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.
141. An objective of all of the members of the European Union has been to
a. abolish tariff and nontariff barriers to trade among member countries.
b. adopt identical fiscal policies for all countries belonging to the EU.
c. form a customs union agreement with members of NAFTA.
d. establish a common currency and a common monetary policy.
142. 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.
143. Which country is NOT a member of the European Union?
a. Spain
b. Germany
c. France
d. Iceland
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144. As of 2002, members of the European Monetary Union agreed to replace their currencies with the
a. mark.
b. dollar.
c. franc.
d. euro.
145. 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
146. 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.
147. 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.
148. A customs union that results in a sizable amount of __________ would be beneficial to global welfare.
a. trade creation
b. trade diversion
c. trade restrictions
d. trade diversification
149. 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
150. The formation of a regional trading bloc results in trade creation if
a. inefficient domestic production is replaced by more efficient production from another member country.
b. inefficient domestic production is replaced by more efficient production from a nonmember country.
c. member countries import more but export less to nonmember countries.
d. member countries export less but import more from nonmember countries.
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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
151. 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.
152. When the United States was considering joining NAFTA, many economists predicted that the U.S. factor of
production that would be most harmed was
a. skilled labor.
b. unskilled labor.
c. capital.
d. entrepreneurship.
153. 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.
154. 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.
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c. trade destruction.
d. trade exhaustion.
155. When the North American Free Trade Agreement was being considered, American critics argued that it would likely
result in
a. a reduction in U.S. competitiveness against Canada.
b. a loss of American jobs to Mexico.
c. a gain in U.S. competitiveness against Mexico.
d. additional jobs for unskilled workers in the United States.
156. According to the theory of optimal currency areas, there are gains to be achieved from sharing a currency across
national boundaries. These gains include
a. higher transactions costs.
b. greater uncertainty for investors.
c. monetary policies run by central banks of member nations.
d. enhanced competition.
157. 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.
158. 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
159. 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.
160. 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.
161. What is meant by economic integration?
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162. What factors influence the extent of trade creation and trade diversion?
163. Explain the theory of optimum currency areas.
164. Who were the losers in the United States as a result of the North American Free Trade Agreement?
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Answer Key
1. False
2. False
3. False
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