Exam 8: Regional Trading Arrangements

Trade creation and trade diversion refer to the short run (static)effects of economic integration while economies of scale,stimulus to investment,and effects on competition refer to the long run (dynamic)effects.

The EU has abolished restrictions on agricultural products traded internally.

Explain the theory of optimum currency areas.

If a customs union includes the low-cost supplier of the world,there would be no adverse trade-diversion effect that would counteract the positive trade-creation effect.

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.The value of the trade diversion effect,resulting from the Greece/France customs union,equals:

Figure 8.2.Portugal's Steel Market -Consider Figure 8.2.If Portugal forms a customs union with France,the resulting trade-creation effect equals $500.

Which country is not a member of the European Union?

It is generally agreed that completing the common market stage of integration for the European Union contributed to overall welfare losses due to trade diversion exceeding trade creation.

The implementation of a common market involves all of the following except:

Members of the European Union find that "trade creation" is fostered when their economies are:

A dynamic welfare gain resulting from the formation of the European Union would be:

Economic integration is the process of eliminating restrictions on international trade,payments,and factor mobility.

Figure 8.2.Portugal's Steel Market -Consider Figure 8.2.If Portugal levies a 100 percent nondiscriminatory tariff on its steel imports,it will purchase 5 tons of steel from France at a price of $500 per ton.

If a customs union included all of the countries in the world,there could exist only trade creation,not trade diversion.

Suppose that government procurement liberalization results in the U.K.government importing automobiles from Germany,the low-cost EU manufacturer.Cost savings could result from all of the following except:

To protect its farmers from foreign competition,the European Union has utilized variable import levies and export subsidies.

Some trade creation was expected to occur as a result of the U.S.-Canada free-trade agreement,since Canadian exports to the United States and U.S.exports to Canada were expected to expand at the expense of imports from Germany and Japan that faced trade restrictions.

By removing discriminatory government procurement laws within the European Union,member nations hoped to benefit from all of the following except:

Under the common agricultural policy,exports of any surplus quantities of EU produce are encouraged through the usage of:

The North American Free Trade Agreement was expected to benefit ____ the most.