CHAPTER 8
REGIONAL TRADING AGREEMENTS
CHAPTER OVERVIEW
This chapter investigates the theoretical and empirical aspects of regional trading arrangements. The chapter begins
by discussing the nature and stages of economic integration: (1) free trade area, (2) customs union, (3) common
market, (4) economic union, and (5) monetary union.
Next discussed is the North American Free Trade Agreement (NAFTA). Emphasis is placed on the case for and
case against NAFTA and also the empirical evidence regarding NAFTA three years after its inception. The chapter
concludes by examining the hurdles that the transition economies have faced in implementing market economies.
After completing this chapter, the student should be able to:
BRIEF ANSWERS TO STUDY QUESTIONS
1. The General Agreements on Tariffs and Trade represent trade liberalization on a nondiscriminatory basis.
2. Economic integration refers to the process of eliminating restrictions on international trade, payments, and
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
4. One major problem confronting the CAP is that agricultural efficiencies differ among members of the European
5. Empirical studies suggest that the static welfare effects of the EU’s formation have generally been favorable
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.