Exam 8: Regional Trading Arrangements

Over the long run, the formation of a customs union may yield welfare gains due to economies of scale, greater competition, and stimulus to investment.

Which of the following represents the stage where economic integration is $\underline { \text { most } }$ complete?

The economic reforms of the early 1990s that occurred in the former Soviet Union and Eastern Europe resulted in:

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.

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):

When the formation of a free trade area results in the reduction of trade with nonmember nations in favor of member countries, ____ occurs.

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 -Consider Figure 8.2. With free trade, Portugal produces 15 tons of steel, consumes 30 tons of steel, and imports 15 tons of steel.

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 due to economies of scale.

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?

For countries forming a customs union, the trade-creation effect represents a welfare loss and the trade-diversion effect represents a welfare gain.

The European Union protects its agricultural producers from import competition by the use of tariff rates that vary directly with world prices.

At the Maastricht Summit of 1991, members of the European Union expressed the goal of achieving the common market stage of economic integration.

In the United States, the proposed North American Free Trade Agreement was generally supported by:

Explain the theory of optimum currency areas.

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 S_G and D_G. 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 -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:

The North American Free Trade Agreement was expected to provide proportionately smaller benefits to Mexico than to the United States or Canada.

Suppose that Mexico and Canada form a free-trade area and Canada begins importing steel from Mexico rather than from Germany. There occurs:

What factors influence the extent of trade creation and trade diversion?

What is meant by economic integration?

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 -Consider Figure 8.2. With free trade, Portugal will import 25 tons of steel from Germany at a price of $200 per ton.