978-0078021770 Chapter 12 Solution Manual

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Suggested answer to case study discussion question

Postwar Trade Integration in Europe: The EU had 28 member countries as of 2014. There are

four groups of countries that could be candidates the join the EU.

First, there are several relatively high-income Western European countries, including

Switzerland, Norway, and Iceland, that are not members of the EU but could join in the future.

None of these countries seems to be eager to join, though Iceland did pursue accession talks for a

few years after its banking crisis of 2008.

Second, there are a number of countries in the Balkans, including Serbia, Montenegro,

Macedonia, Albania, Kosovo, and Bosnia-Herzegovina, that are or could be candidates to join

the EU. Serbia is the largest of these, it is in accession negotiations with the EU, and it may be

the most likely next country to join the EU. Montenegro is also in accession negotiations.

Third, there are several countries of the former Soviet Union in Eastern Europe, including

Ukraine and Moldova, that could be candidates for EU membership. These countries are still

years from even starting accession negotiations.

Fourth, Turkey has been in accession negotiations since 2005, but with only modest progress.

Political changes seem to have made it less likely, but Turkey has a chance to be the next country

to join the EU.

Suggested answers to end of chapter questions and problems

1. Members of a customs union have the same tariff on each category of imported good or

service, regardless of which member country receives the imports. In this case, there is no

need to scrutinize goods that move between countries in the customs union, even if the

product might have been imported from outside the union.

2. No. The most favored nation principle states that any trade policy concession given by a

country to any foreign country must be given to all other foreign countries having MFN

3. Trade creation is the increase in total imports resulting from the formation of a trade

bloc. Trade creation occurs because importing from the partner country lowers the

price in the importing country, so that some high-cost domestic production is replaced

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4. In a free trade area the member countries permit free trade among themselves but each

maintains its own set of tariffs and nontariff barriers to imports from outside countries.

5. a. 10 million DVD recorders times ($110 – $100) = $100 million.

b. To offset this $100 million loss, with linear demand and supply curves, the change in

6. The standard estimates are that Mexico has probably gained from NAFTA, as trade

creation is likely to have been larger than trade diversion, and Mexican firms also gain

from better access to selling to the large U.S. market. In Mexico, the gains are largest for

those sectors tied to exports and for those resources (including less-skilled labor) that are

relatively abundant in Mexico. The standard estimates are that the United States and

7. This case resembles that shown in Figure 12.2A, assuming the United States is a

price-taking country. U.S. consumers gain, as the domestic price drops from $30 to $25.

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8. Trade creation gains and trade diversion losses follow from the basic analysis of the

effects of joining a trade bloc like the European Union. If these were the only effects,

then the speaker should have concluded that the gain to Serbia will be about 1 percent of

its GDP (equal to 2 percent trade creation gains minus 1 percent trade diversion losses).

9. Trade embargoes are usually imposed by large countries that are important in the trade of

the target country. An embargo has a better chance to succeed if it is imposed suddenly

rather than gradually because a sudden interruption of economic flows damages the target

10. Figure 12.3B shows the effects of the embargo on the target country and on the initial

embargoing countries. Let’s focus first on the target country. The target country’s demand

for imports is Dm. If there were no embargo, the world export supply to the target country

would be (Sn + Se), and the price that the target country pays for its imports would be P0.

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f g

Sn′

P1′

Price of

embargoed goods

suffers an additional loss of area f + g. Because the damage to the target country increases

as more countries join the embargo, the embargo is probably more likely to succeed.

11. The “most certain” is (a), a countervailing duty, which, for a competitive industry, brings

net gains for the world as a whole if it just offsets the foreign export subsidy that

provoked it. Whether the world as a whole gains from a customs union depends on

whether it brings more trade creation than trade diversion. Whether the world gains from

an antidumping duty also depends on the specifics of the case, as explained in Chapter

11.

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12. There are three relevant types of countries—the embargoing countries that otherwise

would import, the non-embargo importing countries, and the target country (say, Iraq).

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