International Econ Chapter 12 (Trade Blocs and Trade Blocks)

The Single European Union Act

1. It neutralized separate national product standards that had often been thinly disguised devices for protecting higher-cost domestic products against competition from firms in other member countries. 2. Capital controls on the flows of financial investments were removed. 3. Restrictions on people working in other member countries were generally removed, although there are still some limits on licensed professionals such as lawyers.

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

4 types of economic blocs

true

After the formation of the NAFTA, Mexico became a more attractive country for business investments of foreign firms.

false

It has been observed that trade within MERCOSUR has increased most rapidly in protected capital-intensive products like automobiles, machinery and electronic goods in which the member countries enjoy global comparative advantage.

economic failure of an embargo

the embargo inflicts little damage on the target country's economy but possibly even great damage on the imposing country

trade creation

the net volume of new trade resulting from forming or joining a trade bloc

trade diversion

the volume of trade shifted from low-cost outside exporters to higher-cost bloc-partner exporters

trade blocs and trade embargoes

two kinds of trade barriers that are designed to discriminate

trade bloc

Each member country can import from other member countries freely, or atleast cheaply, while imposing barriers against imports from outside countries.

A. free-trade area

The NAFTA is an example of a(n): A. free-trade area B. customs union C. common market D.economic union

D. NAFTA allows Mexico to better exploit its comparative advantage based on low-skilled workers in such products as apparels, food crops, etc.

Which of the following correctly identifies the impact of the formation of NAFTA on Mexico? A. Mexico's import of financial services and high-tech equipment from the U.S. has declined. B. After Mexico joined NAFTA, the average wage rates for the unskilled workers have declined. C. Mexican exports of fruits and vegetables to the United States declined substantially. D. NAFTA allows Mexico to better exploit its comparative advantage based on low-skilled workers in such products as apparels, food crops, etc.

B. Common set of external tariffs

Which of the following features does a customs union have? A. Free trade among those members which have similar economic policies B. Common set of external tariffs C. Free movement of factors of production D. Harmonization of all economic policies

A. Absence of any trade barriers among the member nations

Which of the following features does a free trade area necessarily have? A. Absence of any trade barriers among the member nations B. Equal tariffs rates C. Free movement of factors of production across the member nations D.Harmonization of all economic policies

C. Trade diversion on agricultural products

Which of the following identifies an important reason why empirical studies find that joining the EC in 1973 may have imposed a substantial net cost on Britain? A. Trade creation for British manufactured goods B. Removal of trade barriers on imports from Australia and New Zealand C. Trade diversion on agricultural products D. Withdrawal of subsidies received by the British farmers

B. The EU

Which of the following is on a path toward full economic unity? A. The NAFTA B. The EU C. The MERCOSUR D. The CAFTA

C. Rules of origin

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

economic sanctions (embargoes)

discriminatory restrictions or bans on economic exchange

MERCOSUR

A South American trade bloc established by the Treaty of Asunción in 1991 and Protocol of Ouro Preto in 1994. Its full members are Argentina, Brazil, Paraguay and Uruguay. Venezuela is a full member but has been suspended since December 1, 2016.

A. the target country is a dictatorship and the dictatorship is jeopardized by retreating from the policy that provoked the embargo.

A political failure of a trade embargo is most likely to occur if: A. the target country is a dictatorship and the dictatorship is jeopardized by retreating from the policy that provoked the embargo. B. the target country is a colony of the imposing country and the embargo adversely affects the imposing country. C. the country that imposes the embargo has an unstable government. D. the imposing country is a relatively smaller country than the target country in terms of trade volume.

true

A trade bloc allows member countries to import from other member countries freely, but imposes trade barriers against imports from countries outside the bloc.

C. both the target country and the country initiating the embargo.

A trade embargo harms: A. only the target country. B. only the country that initiates the embargo. C. both the target country and the country initiating the embargo. D. the target country and the nonembargoing countries.

A. the embargo inflicts little damage on the target country but possibly a greater damage on the imposing country.

An economic failure of an embargo is said to have occurred if: A. the embargo inflicts little damage on the target country but possibly a greater damage on the imposing country. B. the target country suffers a greater welfare loss than does the imposing country. C. the price of the good exported by the imposing country to the target country rises substantially in the target country when the embargo is imposed. D. the prices of the embargoed goods do not decline in the imposing country.

C. Croatia

As of 2011, which of the following Balkan states was closest to qualifying for EU membership? A. Serbia B. Bosnia C. Croatia D. Albania

D. the sanctions are sudden and comprehensive when first imposed.

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

D. encourages increased total trade by each member country.

Formation of trade blocs can be considered beneficial because it: A. encourages purchases from higher-cost producers. B. causes international friction when certain countries are let in the bloc and others are left out. C. diverts world trade from low-cost producers to high-cost producers by encouraging too much trade within blocs. D. encourages increased total trade by each member country.

true

Gains from joining a trade bloc will be higher if the import demands of the member countries are relatively elastic.

B. an instant shift of jobs from the U.S. to the Mexico.

H. Ross Perot's famous claim in 1992 that NAFTA would cause a "great sucking sound" referred to: A. a huge increase in foreign direct investment in the U.S. B. an instant shift of jobs from the U.S. to the Mexico. C. a rapid increase in the U.S. exports to Canada. D. a rapid increase in the wage inequality in Mexico.

1. The rules can limit the ability of firms in one member country to export freely to buyers in other member countries. They can create a nontariff barrier that hinders cross-member trade within the free-trade area. 2. The rules can create local content requirements that provide protection for the area of producers of materials and components against rival suppliers of these materials and components from the outside area.

How are the rules of origin for NAFTA protectionist? (there are 2 ways)

true

If the target country of an embargo has a very inelastic demand for imports, the embargo is more likely to be successful in an economic sense.

true

In a customs union, members remove all trade barriers among themselves and adopt a common set of external barriers.

false

Members of a free trade area not only remove barriers among themselves but also engage in free trade with the non-member countries.

false

NAFTA has not only eliminated all tariffs and nontariff barriers to trade within the member countries but also allows free human migration across the countries.

trade embargo

Some countries discriminate against certain other countries, usually because of a policy dispute. They deny the outflow of goods, services, or assets to a particular country while allowing export to other countries, discriminate against imports from the targets country, or block both exports to and imports from the target. (this is also known as trade blocks)

false

The Single European Act that came into effect in 1992 removed restrictions on people working in other member countries but retained restrictions on the flows of financial investments across the member countries.

B. customs union

The Southern Common Market (MERCOSUR) is actually a _____. A. free trade area B. customs union C.economic union D.common market

false

The WTO does not permit any deviation from the MFN principle, even for the developing countries.

false

The formation of a trade bloc necessarily improves well-being worldwide because it is a step toward free trade.

major modern trade bloc

The formation of the EU's customs union was the first ...

false

The gains from joining a trade bloc are tied to trade diversion and the losses are tied to trade creation.

A. its import demand curve is relatively elastic.

The gains from trade creation is likely to be larger for a country if: A. its import demand curve is relatively elastic. B. it mainly imports primary products. C. the country's government sufficiently subsidizes the production of its exportable goods. D. the supply of the imported good by the foreigners is relatively inelastic.

C. the good can be produced at relatively lower cost in the bloc-partners than in the outside world.

The net loss from trade diversion for a country is likely to be smaller if: A. the county's import demand is more elastic. B. the country's tariff rate on the product is higher. C. the good can be produced at relatively lower cost in the bloc-partners than in the outside world. D. the bloc partner's export price is closer to the tariff-inclusive price for imports from countries outside the bloc.

false

Turkey joined the EU in 2008 after implementing the necessary political and economic policy changes.

1. An increase in competition can reduce prices. 2. An increase in competition can lower costs of production. 3. Firms can lower costs by expanding their scale of production. 4. Consumers gain access to a larger number of varieties or models of a product. 5. Forming the trade bloc increases opportunities for business investments.

What are the 5 possible sources of additional gains from forming a trade bloc?

One with costs that are almost as low somewhere within the bloc as in the outside world and highly elastic demands for imports.

What is the best case scenario for countries in a trade bloc?

One with inelastic import demands and high costs throughout the trade bloc.

What is the worst case scenario for countries in a trade bloc?

false

When a few countries join a trade bloc, it not only expands the market for their firms but also creates a larger market for the countries outside the bloc.

C. Bulgaria and Romania

Which countries joined the European Union in 2007? A. The Czech Republic and Slovakia B. Portugal and Spain C. Bulgaria and Romania D. Macedonia and Montenegro

B. A trade bloc

Which of the following allows member countries to import from other member countries freely, but imposes trade barriers against imports from outside countries? A. A trade embargo B. A trade bloc C.A cultural union D. A trade union

D. The new members were allowed to impose a nominal tariff on the imports from the other members to stabilize themselves for the first seven years.

Which of the following is NOT among the features that are phased in gradually during the integration of new members in the European Union? A. The subsidies that the farmers of the new members receive started at only one-fourth of the standard levels for the common agricultural policy. B. The new members were not full members of the common market for labor. C. The citizens of the new members were not generally free to work in most other EU countries until seven years after the country joined the EU. D. The new members were allowed to impose a nominal tariff on the imports from the other members to stabilize themselves for the first seven years.

D. There is free movement of capital and labor among the member countries

Which of the following is true of a common market? A. The member countries export similar products to the non-member countries. B. The member countries do not import any good from the non-member countries. C. The member countries have identical monetary and fiscal policies. D. There is free movement of capital and labor among the member countries.

D. Harmonization of all economic policies in the member countries

Which of the following is true of an economic union? A. Free movement of resources, but restricted movement of goods among the member countries B. The members have a common set of tariffs among themselves but the external tariff rates are determined independently C. Free movement of goods, but restricted movement of resources across the member countries D. Harmonization of all economic policies in the member countries

B. Embargoes are discriminatory restrictions or bans on economic exchange.

Which of the following is true of trade embargoes? A. A trade embargo refers to a uniform tariff being imposed on all imported products by a country. B. Embargoes are discriminatory restrictions or bans on economic exchange. C. Unlike other trade restrictions, a trade embargo does not harm the imposing country. D. Trade embargoes refer to import bans on tangible goods, and not services.

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

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

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

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

C. A trade bloc may lower firms' costs by allowing them to exploit economies of scale.

Which of the following statements about a trade bloc is accurate? A. The gains from a trade bloc are shared equally by each member. B. Increased competition within a trade bloc can result in higher commodity prices in the domestic markets of the member countries. C. A trade bloc may lower firms' costs by allowing them to exploit economies of scale. D. A trade bloc can increase the opportunities for domestic business investments but usually repels foreign direct investments into the member countries.

C. The most favored nation principle

Which of the following states that any trade concession given to any foreign country must be given to all other countries having the same status? A. The principle of retaliation B. The structural adjustment program C. The most favored nation principle D. The purchasing power parity theory

C. Imports of clothing and textiles into the member countries were diverted away from low-cost suppliers in Asia.

Which of the following was an observable effect of NAFTA? A. NAFTA led to a substantial decrease in the volume of trade among the three member countries. B. Low-cost firms in Canadian manufacturing industries were replaced by the high-cost firms. C. Imports of clothing and textiles into the member countries were diverted away from low-cost suppliers in Asia. D. There was massive shift of jobs toward Mexico.

rules of origin

determine which products have been produced within the free-trade area, so that they are traded freely within the area, and which products have not been produced within the area

NAFTA

free trade agreement between Canada, the United States, and Mexico

economic union

member countries unify all their economic policies, including monetary and fiscal policies as well as policies toward trade and factor migration

common market

members allow full freedom of factor flows (migration of labor and capital) among themselves in addition to having a customs union

customs union

members remove barriers to trade among themselves and adopt a common set of external barriers

free-trade area

members remove trade barriers among themselves but keep their separate national barriers against trade with the outside world

political failure of an embargo

occurs when the target country's national decision-makers have so much stake in the policy that provoked the embargo that they will stick with that policy even if the economic cost to their nation becomes extreme