Instructor’s Manual
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.
Of particular importance are the economic effects of a regional trading arrangement. The chapter analyzes the
short-run effects of trade creation and trade diversion. Next are the long-run effects which include economies of
scale, competition, and stimulus of investment.
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
Instructor’s Manual
4. One major problem confronting the CAP is that agricultural efficiencies differ among members of the
5. Empirical studies suggest that the static welfare effects of the EU’s formation have generally been
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.