International Econ Ch. 12

what fraction of US-Mexico trade involves offshoring

1/2

what fraction of trade is within trade blocs as of 2014?

1/2

what fraction of sanctions are successful?

1/3

rules of origin

A version of domestic-content regulations in which products are certified to have been produced within a free-trade area (and so are permitted to trade without barriers in that area). Without such rules, a non-member Country X may circumvent Country Y's high external tariff by exporting its good to Y's free-trade partner, Country Z.

If, after the creation of the EU, the British have an incentive to purchase less efficiently produced Irish cheese rather than importing inexpensive cheese from New Zealand, this probably shows A. trade creation. B. trade diversion. C. government interference in the marketplace. D. common sense.

B

The United States was able to initiate most of the trade embargoes in the last four decades mainly because A. the U.S. is a superpower. B. the U.S. has high demand and supply elasticities in a significant number of products and can, therefore, influence trade. C. other countries cannot do without U.S. trade. D. embargoes are usually successful.

B

Trade sanctions are A. usually successful as long as the imposing countries are developed countries. B. more likely to be successful when the sanctioning countries have high trade elasticities. C. more likely to be successful when the sanctioning countries have low trade elasticities. D. successful mostly due to world cooperation, not trade elasticities.

B

If all member nations of a customs union are fully employed before and after the formation of the union, then (assuming that trade diversion does not dominate) A. the welfare of the member nations will decrease. B. the welfare of the member nations will increase but world welfare will decrease. C. the welfare of the member nations and the world will increase. D. no member nations will have time to organize good soccer matches.

C

Which of the following is not correct? A. The formation of a common market allows the free movement of factors of production between member nations. B. The 1992 EC common market overturned Italian Pasta Protection Laws, which protected higher-cost producers. C. A common market coordinates monetary and fiscal policies of members. D. Common markets have been more successful among rich countries than among poor countries.

C

trade embargoes

countries discriminate against certain other countries (usually because of policy disputes), deny outflow of goods/services/assets & discriminate against imports

trade bloc

each member country can import from other member countries freely or cheaply, impose barriers outside the bloc

if embargoed country's demand curve is ___________ (elastic/inelastic; flatter/steeper), embargo is likely to be ineffective

flatter; elastic

What is the WTO's stance toward trade blocs?

formally anti-trade discrimination, but none have been ruled in violation-- as long as barriers against outsiders aren't RAISED in the process of creation, they are technically toward the goal of liberalization

types of trade blocs

free trade area, customs union, common market, economic union

common market

full freedom of factor flows (migration of labor & capital) among themselves, on top of being a customs union. EU became a common market in 92

what are additional gains from trade blocs? (not trade creation)

increase in competition can reduce prices (less monopolies) increase in competition can lower costs of production (pressure to implement to tech, lower costs) firms can lower costs by expanding scale of production by expanding consumer base consumers gain access to larger number of varieties/models of product increases opportunities for business investments

free trade area

keep separate national trade barriers against outsiders, remove trade barriers against each other -- most common (like NAFTA)

are trade blocs good?

they are a move toward free trade but if the removed tariff is from a high-production source, it encourages purchasing more expensive goods (vs equal tariff on all imports would lead consumers to buy most cheaply produced goods)

what are the two scenarios for trade blocs?

trade creation outweighs trade diversion or trade diversion outweighs trade creation

economic union

unify all economic policies (monetary + fiscal), as well as policies toward trade and factor migration. belgium + luxembourg since 1921, EU on the path toward economic unity

An economic failure of an embargo is said to have occurred if the: Embargo inflicts little damage on the target country and greater damage on the imposing country. Target country suffers a greater welfare loss than does the imposing country. Price of the good exported by the imposing country to the target country rises substantially in the target country when the embargo is imposed. Prices of the embargoed goods do not decline in the imposing country.

Embargo inflicts little damage on the target country and greater damage on the imposing country.

The formation of a customs union will definitely raise welfare.

F

The less elastic the import demand curve, the greater the gains from a customs union.

F

An export embargo will backfire if the embargoing country has an inelastic export supply curve while the target country has an elastic import demand curve.

T

Customs unions are more likely to be successful among developed countries than among less-developed countries.

T

Trade discrimination is bad in the sense that separate deals with separate nations may destroy many of the gains from global markets.

T

Which of the following refers to trade creation? The net increase in exports when the currency of a country depreciates with respect to a foreign currency. The net increase in imports when foreign firms lower the prices of their exports. The net volume of new trade that results from the formation of a trade bloc. The net change in the volume of trade when a country raises its barriers on its imports.

The net volume of new trade that results from the formation of a trade bloc.

Embargoes are likely to be economically effective when: The supply curve of the embargoing country is highly inelastic. The demand for imports by the target country is relatively elastic. A small county imposes an embargo on a large country. The sanctions are sudden and comprehensive when first imposed.

The sanctions are sudden and comprehensive when first imposed.

Which of the following refers to trade diversion? The volume of trade that is redirected from low-cost exporters to higher cost domestic firms when the domestic government imposes import restrictions. The volume of trade that is redirected from low-cost exporters to higher-cost trade bloc member countries. The amount of the imported goods that is substituted with domestically produced goods. The change in the trade pattern such that the good which was formerly imported is now exported as the government subsidizes its production.

The volume of trade that is redirected from low-cost exporters to higher-cost trade bloc member countries.

why did Doha fail?

US business lobbies didn't accept it, Obama didn't confront them

product selection bias

advanced economies lower tariff only on products of interest to them from less developed countries, since they expected reciprocal concessions in trade in return for freely given aid

what determines elasticity of demand in embargoed country?

availability of substitutes

what makes sanctions more likely to be effective?

big countries target small ones sudden & comprehensive when first imposed citizens can apply political pressure

what are tendencies that create greater gains from a trade bloc?

lower partner costs relative to outside world costs will increase gains (any trade diversion will be less costly) more elastic import demands will increase gains (trade creation in response to domestic price decreases will be greater)

NAFTA, twenty year judgement?

net gain- substantial increase in trade, increase in competition, no massive shift of US jobs

what types of sanctions failures are there

political failures-- leaders have too much stake in the policy economic failures -- embargo inflicts little damage on the target country (elastic import demand) or too much demage on inflicting country (inelastic export supply)

customs union

remove internal barriers, adopt common set of external barriers

_____ determine(s) which products have been produced within a free-trade area and which products have been produced outside the area and are therefore subject to trade barriers. Trade diversion. Trade creation. Rules of origin. The most-favored-nation (MFN) principle.

rules of origin