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Instructor’s Manual
1. The General Agreements on Tariffs and Trade represent trade liberalization on a nondiscriminatory
basis. Participating nations acknowledge that tariff reductions agreed to by any two nations will be
2. Economic integration refers to the process of eliminating restrictions on international trade, payments,
and factor mobility. The stages of economic integration include free trade area, customs union,
3. The formation of a customs union results in static, or once-and-for-all, welfare effects. Included is a
welfare-increasing trade creation effect and a welfare-reducing trade diversion effect. A country's
decision to participate in the customs union depends on which of these effects is the most significant.
4. One major problem confronting the CAP is that agricultural efficiencies differ among members of the
European Community. This has led to internal disputes over the level of support provided to member
5. Empirical studies suggest that the static welfare effects of the EU's formation have generally been
favorable for member countries. The benefits associated with trade creation appear to offset the
Instructor’s Manual
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in
6. a. Germany exports gloves to Portugal. For Portugal, Qs = 4, Qd = 14, Imports = 10.
b. Germany exports gloves to Portugal. For Portugal, Qs = 8, Qd = 10, Imports = 2.
c. Trade creation effect = $2, trade diversion effect = $2. The overall welfare of Portugal does not
