ECO 361: Chapter 8
31. Consider to Figure 8.1. Assume Greece levies a per-unit tariff of $20 on imports from both Germany and France. Greece will import: a. 1 calculator from Germany b. 1 calculator from France c. 3 calculators from Germany d. 3 calculators from France
a. 1 calculator from Germany
34. Referring to Figure 8.1, suppose Greece forms a customs union with France. Greece will import: a. 3 calculators at a per-unit price of $30 b. 3 calculators at a per-unit price of $40 c. 6 calculators at a per-unit price of $30 d. 6 calculators at a per-unit price of $40
a. 3 calculators at a per-unit price of $30
22. The European Union has achieved all of the following except: a. Adopted a common fiscal policy for member nations b. Established a common system of agricultural price supports c. Disbanded all tariffs among its member countries d. Levied common tariffs on products imported from nonmembers
a. Adopted a common fiscal policy for member nations
72. A common market a. Allows the imposition of common external trade barriers against non-members b. Represents less economic integration than a free trade area c. Does not permit free movement of goods among member nations d. Does not allow free movement of factors of production among nations
a. Allows the imposition of common external trade barriers against non-members
20. Under the European Union's common agricultural policy, a variable import levy equals the: a. Amount by which the EU's support price exceeds the world price b. Amount by which the world price exceeds the EU's support price c. Support price of the EU d. World price
a. Amount by which the EU's support price exceeds the world price
69. According to the theory of optimum currency areas, a currency area has the least chance for success when: a. Countries of the currency area have differing business cycles b. Workers have a high degree of mobility across borders of the currency area c. Prices and wages can be adjusted in response to economic disturbances d. A single monetary policy affects all member countries in the same manner
a. Countries of the currency area have differing business cycles
70. A main disadvantage of the European Monetary Union is that: a. Each member country loses the use of monetary policy as to tool to combat recession b. There is a high degree of labor mobility among the member countries c. Prices are highly flexible in response to changing economic conditions d. Wages are highly flexible in response to changing economic conditions
a. Each member country loses the use of monetary policy as to tool to combat recession
54. When Mexico became a part of NAFTA, along with Canada and the United States, it: a. Eliminated tariffs against Canada and the United States but maintained them against nonmembers b. Eliminated tariffs against Canada, the United States, and all nonmember countries c. Increased tariffs against Canada the United States, and all nonmember countries d. Increased tariffs against Canada and the United States, but did not change them against nonmember countries
a. Eliminated tariffs against Canada and the United States but maintained them against nonmembers
3. Which of the following represents the stage where economic integration is least complete? a. Free trade area b. Monetary union c. Common market d. Customs union
a. Free trade area
45. 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): a. Free trade area b. Customs union c. Common market d. Economic union
a. Free trade area
21. Members of the European Union find that "trade creation" is fostered when their economies are: a. Highly competitive b. Highly noncompetitive c. Small in economic importance d. Geographically distant
a. Highly competitive
26. The implementation of the European Union has: a. Made it harder for Americans to compete against the Germans in the British market b. Made it easier for Americans to compete against the Germans in the British market c. Made it harder for Americans to compete against the Japanese in the British market d. Made it easier for Americans to compete against the Japanese in the British market
a. Made it harder for Americans to compete against the Germans in the British market
66. Suppose that Canada has domestic firms that could supply its entire market for radios at a price of $50, while U.S. firms could supply radios at $40 and Mexico at $30. Suppose that Canada initially has a 50 percent tariff on imports of radios and then forms a free trade area with Mexico. As a result, Canada realizes: a. Trade creation, no trade diversion, and overall welfare gains b. Trade creation, no trade diversion, and overall welfare losses c. Trade diversion, no trade creation, and potential overall welfare losses d. Trade diversion, trade creation, and potential overall welfare gains
a. Trade creation, no trade diversion, and overall welfare gains
46. Suppose that Mexico and Canada form a free-trade area and Canada begins importing steel from Mexico rather than from Germany. There occurs: a. Trade diversion b. Trade creation c. Trade destruction d. Trade exhaustion
a. Trade diversion
4. Customs union theory reasons that the formation of a customs union will decrease members' real welfare when the: a. Trade diversion effect exceeds the trade creation effect b. Trade production effect exceeds the trade consumption effect c. Trade consumption effect exceeds the trade production effect d. Trade creation effect exceeds the trade diversion effect
a. Trade diversion effect exceeds the trade creation effect
23. When the United States, Canada, and Mexico form a free trade area, and Mexico begins importing a product from Canada rather than from the lowest cost world producer. a. Trade diversion occurs b. Trade creation occurs c. World welfare rises d. World welfare falls to zero
a. Trade diversion occurs
77. Consider Figure 8.2. With free trade, Portugal will import 25 tons of steel from Germany at a price of $200 per ton. a. True b. False
a. True
80. Consider Figure 8.2. If Portugal forms a customs union with France, the resulting trade-creation effect equals $500. a. True b. False
a. True
85. Under the variable levy system of the European Union, EU farmers are protected against import competition by tariffs that vary inversely with the world price. a. True b. False
a. True
86. Trade creation tends to more than offset trade diversion for a home country forming a customs union with partner countries when: (1) the tariff rate in the home country is high prior to the formation of the customs union; (2) there are a large number of countries forming the customs union. a. True b. False
a. True
90. Economic integration is the process of eliminating restrictions on international trade, payments, and factor mobility. a. True b. False
a. True
93. If the United Kingdom and Italy eliminate all tariffs on each other's goods and all restrictions to factor movements between them, and implement a uniform system of import restrictions against the rest of the world, these countries have formed a common market. a. True b. False
a. True
94. The highest stage of economic integration is a monetary union. a. True b. False
a. True
96. Suppose that Mexico and Canada form a free-trade area. The Mexicans then decrease refrigerator manufacturing and increase imports of refrigerators from Canada, while the Canadians decrease auto manufacturing and import more autos from Mexico. This is an example of trade creation. a. True b. False
a. True
97. 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. a. True b. False
a. True
52. In the United States, which group was most likely to be hurt by the North American Free Trade Agreement? a. Unskilled labor b. Skilled labor c. Owners of capital equipment d. Owners of financial capital
a. Unskilled labor
7. 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? a. Variable levies b. Import quotas c. Import subsidies d. Domestic content regulations
a. Variable levies
38. Consider Figure 8.1. Suppose Greece had formed a customs union with Germany, rather than France. The value of the trade diversion effect would be: a. Zero b. $5 c. $10 d. $15
a. Zero
64. The task of creating an economic union is: a. difficult b. relatively easy c. similar to creating a customs union d. None of the above
a. difficult
58. As new regional trading arrangements are formed, the opportunity cost of remaining outside: a. increases b. decreases c. remains stable d. none of these
a. increases
76. Consider Figure 8.2. With free trade Portugal will a. produce 10 tons of steel, consume 35 tons of steel and import 25 tons of steel b. produce 15 tons of steel, consume 30 tons of steel and import 15 tons of steel c. produce 0 tons of steel, consume 35 tons of steel and import 35 tons of steel d. produce 15 tons of steel, consume 35 tons of steel and import 20 tons of steel
a. produce 10 tons of steel, consume 35 tons of steel and import 25 tons of steel
59. Regarding the interests of a nonmember nation of a regional trading agreement: a. the exporting interests of the nonmember nation outweigh its import competing interests b. the import competing interests of the nonmember nation outweigh its exporting interests c. the nonmember nation will have a better negotiating position d. the nonmember nation has no interest in the regional trading arrangement
a. the exporting interests of the nonmember nation outweigh its import competing interests
35. Consider Figure 8.1. The value of the trade diversion effect, resulting from the Greece/France customs union, equals: a. $5 b. $10 c. $15 d. $20
b. $10
36. Consider Figure 8.1. The value of the trade creation effect, resulting from the Greece/France customs union, equals: a. $5 b. $10 c. $15 d. $20
b. $10
33. 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: a. $20 b. $40 c. $60 d. $80
b. $40
48. If the United States and Canada abolish all tariffs on each other's goods and implement a common tariff on goods imported from other countries, there occurs a (an): a. Free-trade area b. Customs union c. Common market d. Economic union
b. Customs union
27. The common agricultural policy of the European Union has: a. Increased American farm exports to the EU b. Decreased American farm exports to the EU c. Lowered the price of American farm exports to the EU d. Not affected the price of American farm exports to the EU
b. Decreased American farm exports to the EU
41. In the United States, the proposed North American Free Trade Agreement was generally supported by: a. Labor unions b. Electronics firms c. Environmentalists d. Citrus producers
b. Electronics firms
29. Under the common agricultural policy, exports of any surplus quantities of EU produce are encouraged through the usage of: a. Variable levies b. Export subsidies c. Import quotas d. Countertrade
b. Export subsidies
100. Trade creation occurs when imports from a low-cost supplier outside of a customs union are replaced by purchases from a higher-cost supplier within the union. a. True b. False
b. False
78. Consider Figure 8.2. With free trade, Portugal produces 15 tons of steel, consumes 30 tons of steel, and imports 15 tons of steel. a. True b. False
b. False
79. 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. a. True b. False
b. False
81. Consider Figure 8.2. If Portugal forms a customs union with France, the resulting trade-diversion effect equals $400. a. True b. False
b. False
82. Consider Figure 8.2. As a result of a customs union formed with France, Portugal's overall welfare rises by $900. a. True b. False
b. False
83. Consider Figure 8.2. If Portugal had formed a customs union with Germany, Portugal's welfare would have decreased by $500. a. True b. False
b. False
84. The European Union protects its agricultural producers from import competition by the use of tariff rates that vary directly with world prices. a. True b. False
b. False
87. If Chile and Mexico form a free-trade agreement, the welfare of the two countries will necessarily increase. a. True b. False
b. False
88. If Chile and Mexico abolish all tariffs on each other's products while maintaining their own tariffs against other countries, these two countries have formed a customs union. a. True b. False
b. False
89. With a preferential trading arrangement, a group of countries agrees to unilaterally reduce tariffs applied to imports from all countries of the world. a. True b. False
b. False
91. When a group of countries establish a free-trade area, they achieve the highest stage of economic integration. a. True b. False
b. False
92. 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. a. True b. False
b. False
95. Trade creation would occur if Canada and the United States form a free-trade area, and Canadians then import less steel from the United States while importing more steel from Japan. a. True b. False
b. False
98. For countries forming a customs union, the trade-creation effect represents a welfare loss and the trade-diversion effect represents a welfare gain. a. True b. False
b. False
99. In the short run, Mexico would realize overall welfare gains from becoming a member of the North American Free Trade Agreement if the resulting diseconomies of scale effect more than offset the competition effect. a. True b. False
b. False
19. NAFTA is a: a. Monetary union b. Free trade area c. Common market d. Customs union
b. Free trade area
18. Which nation is not a member of the North American Free Trade Association? a. Canada b. Greenland c. Mexico d. United States
b. Greenland
51. The North American Free-Trade Agreement was most strongly opposed by U.S.: a. Electronics manufacturers b. Labor unions c. Commercial banks d. Engineering companies
b. Labor unions
50. The North American Free Trade Agreement was expected to benefit ____ the most. a. Canada b. Mexico c. Greenland d. United States
b. Mexico
47. Suppose that Mexico and Canada form a free-trade area. Mexicans then decrease auto manufacturing and increase imports of autos from Canada, while the Canadians decrease computer production and import more computers from Mexico. This is an example of: a. Trade diversion b. Trade creation c. Trade destruction d. Trade exhaustion
b. Trade creation
14. A static welfare effect resulting from the formation of the European Union would be: a. Economies of scale b. Trade diversion c. Investment incentives d. Increased competition
b. Trade diversion
8. Which trade instrument has the European Union used to insulate its producers and consumers of agricultural goods from the impact of changing demand and supply conditions in the rest of the world? a. Domestic content regulations b. Variable import levies c. Voluntary export quotas d. Orderly marketing agreements
b. Variable import levies
60. The WTO's efforts to promote trade liberalization globally: a. have become easier b. have become more difficult c. have remained stable d. none of these is correct
b. have become more difficult
11. Which of the following organizations is considered a regional trading arrangement? a. Organization of Petroleum Exporting Countries b. North Atlantic Treaty Organization c. Benelux d. International Tin Agreement
c. Benelux
13. Which form of economic integration occurs when participating countries abolish tariffs on trade among themselves, establish a common tariff on imports from nonmembers, and permit free movement of capital and labor within the organization? a. Free trade area b. Economic union c. Common market d. Monetary union
c. Common market
49. Suppose that the United Kingdom and Italy abolish all tariffs on each other's goods and all restrictions on movements of factors of production between them. They also implement a common protectionist policy toward other countries. This is an example of a (an): a. Free-trade area b. Customs union c. Common market d. Economic union
c. Common market
6. By 1992 the European Union had become a full-fledged: a. Economic union b. Monetary union c. Common market d. Fiscal union
c. Common market
16. Which organization was founded in 1957 whose objective was to create an economic union among its members? a. General Agreements on Tariffs and Trade b. Organization of Economic Cooperation and Development c. European Union d. Latin American Free Trade Association
c. European Union
40. In 1989 Canada and the United States agreed to implement a (an) ____ over a ten year period. a. Customs union b. Common market c. Free trade area d. Economic union
c. Free trade area
68. The formation of the European Monetary Union is expected to entail benefits for member countries which include all of the following except: a. Greater certainty for investors within the EMU b. Lower costs of transactions within the EMU c. Independent monetary policies run by the central bank of each member country d. Enhanced competition among companies in member countries
c. Independent monetary policies run by the central bank of each member country
73. The gains from having an optimum currency include a. Price differentiation b. Lower competition c. Lower transaction costs d. Both b and c
c. Lower transaction costs
2. Which of the following represents the stage where economic integration is most complete? a. Economic union b. Customs union c. Monetary union d. Common market
c. Monetary union
57. Smaller nations may seek safe haven trading arrangements with larger nations when future access to that market seems uncertain. This was reason for the formation of: a. WTO b. GATT c. NAFTA d. none of these
c. NAFTA
44. 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: a. Competition effect b. Scale-economy effect c. Protective effect d. Trade effect
c. Protective effect
9. Assume that the formation of a customs union turns out to include the lowest-cost world producer of the product in question. Which effect could not occur for the participating countries? a. Trade creation-production effect b. Trade creation-consumption effect c. Trade diversion d. Scale economies and competition
c. Trade diversion
63. The United States serves as an example of: a. a common market b. a common union c. a monetary union d. a free trade area
c. a monetary union
32. Consider Figure 8.1. Assume Greece levies a per-unit tariff of $20 on imports from both Germany and France. As a result of the $20 tariff, Greece's consumer surplus falls by: a. $90 b. $100 c. $110 d. $120
d. $120
39. According to Figure 8.1, the formation of a Greece/Germany customs union would result in: a. $20 of trade diversion b. $40 of trade diversion c. $20 of trade creation d. $40 of trade creation
d. $40 of trade creation
30. Consider Figure 8.1. With free trade, Greece imports: a. 3 calculators from France b. 5 calculators from France c. 3 calculators from Germany d. 5 calculators from Germany
d. 5 calculators from Germany
28. The implementation of a common market involves all of the following except: a. Elimination of trade restrictions among member countries b. A common tax system and monetary union c. Prohibition of restrictions on factor movements d. A common tariff levied in imports from nonmembers
d. A common tariff levied in imports from nonmembers
43. By removing discriminatory government procurement laws within the European Union, member nations hoped to benefit from all of the following except: a. EU governments could purchase from the cheapest foreign suppliers b. Increased competition occurs as domestic firms compete with foreign firms previously shut out of the domestic market c. Industries are restructured which permits surviving firms to achieve economies of scale d. Agricultural prices fall as more farmers are allowed to produce their commodities
d. Agricultural prices fall as more farmers are allowed to produce their commodities
71. World welfare under a customs union a. Increases due to a trade creation effect b. Decreases due to a trade diversion effect c. Depends on the relative strength of the trade creation effect and the trade diversion effect d. All of the above
d. All of the above
74. Luxembourg is a member of: a. a free trade area b. a monetary union c. Benelux d. Both a and c
d. Both a and c
5. Which economic integration scheme is solely intended to abolish trade restrictions among member countries, while setting up common tariffs against nonmembers? a. Economic union b. Common market c. Free trade area d. Customs union
d. Customs union
15. A dynamic welfare gain resulting from the formation of the European Union would be: a. Trade diversion b. Trade creation c. Diseconomies of scale d. Economies of scale
d. Economies of scale
17. The common agriculture policy of the European Union has supported European farmers via: a. Export tariffs and domestic content regulations b. Variable levies and voluntary export agreements c. Content regulations and export subsidies d. Export subsidies and variable levies
d. Export subsidies and variable levies
1. The European Union is primarily intended to permit: a. Countries to adopt scientific tariffs on imports b. An agricultural commodity cartel within the group c. The adoption of export tariffs for revenue purposes d. Free movement of resources and products among member nations
d. Free movement of resources and products among member nations
25. Which country is not a member of the European Union? a. Spain b. Germany c. France d. Iceland
d. Iceland
42. At the Maastricht Summit of 1991, European Union negotiators called for the pursuit of a: a. Free trade area b. Customs union c. Common market d. Monetary union
d. Monetary union
37. Consider Figure 8.1. Comparing the trade creation and trade diversion effects, the impact of the Greece/France customs union on the welfare of Greece is: a. A $5 increase in economic welfare b. A $10 increase in economic welfare c. A $5 decrease in economic welfare d. No change in economic welfare
d. No change in economic welfare
10. Which organization of nations permits free trade among its members in industrial goods, while each member maintains freedom in its trade policies toward non-member countries? a. European Union b. Benelux c. Council for Mutual Economic Assistance d. North American Free Trade Association
d. North American Free Trade Association
12. When products from high-cost suppliers within a customs union replace imports from a low-cost nation that is not a member of the customs union, there exist(s): a. Dynamic welfare losses b. Dynamic welfare gains c. Trade creation d. Trade diversion
d. Trade diversion
24. When the formation of a free trade area results in the reduction of trade with nonmember nations in favor of member countries, ____ occurs. a. Trade devaluation b. Trade revaluation c. Trade creation d. Trade diversion
d. Trade diversion
53. By joining NAFTA, the United States, Canada, and Mexico would find their short-run welfare decreasing due to the: a. Economies of scale effect b. Business investment effect c. Trade creation effect d. Trade diversion effect
d. Trade diversion effect
65. Suppose that Canada has domestic firms that could supply its entire market for radios at a price of $50, while U.S. firms could supply radios at $40 and Mexico at $30. Suppose that Canada initially has a 50 percent tariff on imports of radios and then forms a free trade area with the United States. As a result, Canada realizes: a. Trade creation, no trade diversion, and overall welfare gains b. Trade creation, no trade diversion, and overall welfare losses c. Trade diversion, no trade creation, and potential overall welfare losses d. Trade diversion, trade creation, and potential overall welfare gains
d. Trade diversion, trade creation, and potential overall welfare gains
55. Among the benefits that a regional trading arrangement can provide are all of these EXCEPT: a. economies of large scale production b. specialization fostering c. attracting foreign investment d. a shorter production time
d. a shorter production time
62. Regarding a common market, which of the following is true? a. permits the free movement of goods and service among members b. exercises common external trade restrictions against outsiders c. represents a more complete integration of member nations than a customs union d. all of these are true
d. all of these are true
67. As of 2002, members of the European Monetary Union agreed to replace their currencies with the: a. mark b. dollar c. franc d. euro
d. euro
75. Consider Figure 8.2. With free trade Portugal will a. import 0 tons of steel for Germany and 15 tons of steel from France at $300 per ton b. import 25 tons of steel from Germany at $200 per ton and 15 tons of steel from France at $300 per ton c. import 15 tons of steel from Germany at $200 per ton and 10 tons of steel from France at $200 per ton d. import 25 tons of steel from Germany at $200 per ton and 0 tons from France
d. import 25 tons of steel from Germany at $200 per ton and 0 tons from France
56. Regarding the benefits of regional trade agreements, which of the following is NOT a benefit? a. regional trade agreements may help manage immigration flows b. regional trade agreements promote regional security c. regional trade agreements may help lock in policy shifts towards market oriented reform d. regional trade agreements may promote democracy
d. regional trade agreements may promote democracy
61. All of the following are factors mitigating against global trade liberalization EXCEPT: a. regional trading arrangements may limit trade liberalization with outsiders b. a small nation might do better entering into a pact with a larger nation, rather than competing globally c. trading bloc members may not realize economies of scale through global liberalization d. trading bloc members prefer competing globally rather than locally
d. trading bloc members prefer competing globally rather than locally