Chapter 8

If A forms a customs union with C, the value of trade diversion will be

0

If A imposes a per unit tariff of $10 on imports from both B and C, A will import

200 units from C

If A forms a customs union with B, A will import

400 units from B

In free trade, A will import

600 units from country C

A free trade area is like a customs union except it members adopt a common external tariff structure.

False

A long-run goal of the NAFTA members is to integrate their economies into an economic and monetary union, with common fiscal and monetary policies.

False

An advantage of the European Monetary Union (Eurozone) is that its member countries have common fiscal policies.

False

Before joining the NAFTA in 1994, Mexico adopted essentially a free-trade policy towards Canada and the US.

False

Critis of the NAFTA feared that many Americans would migrate to Mexico to find jobs.

False

Under NAFTA, Canada, Mexico and the US agreed to adopt free trade among each other, but also to fully harmonize their fiscal and monetary

False

Supply and Demand for Gloves: Portugal Price ($) Quantity Supplied Quantity Demanded 0 0 18 1 2 16 2 4 14 3 6 12 4 8 10 5 10 8 6 12 6 7 14 4 8 16 2 9 18 0 Assume that Germany and France can supply gloves to Portugal at a price of $2 and $3, respectively. With free trade, which nation exports gloves to Portugal? How many gloves does Portugal produce, consume, and import?

Germany exports gloves to Portugal. For Portugal, Qs = 4, Qd = 14, Imports = 10.

Suppose Portugal levies a 100 percent nondiscriminatory tariff on its glove imports. Which nation exports gloves to Portugal? How many gloves will Portugal produce, consume, and import?

Germany exports gloves to Portugal. For Portugal, Qs = 8, Qd = 10, Imports = 2.

Which country is not a member of the European Union?

Iceland

Suppose instead of Portugal forms a custom union with Germany. Is this a trade of diverting or trade creating customs union? By how much does the customs union increase or decrease the welfare of Portugal?

Trade creating customs union. The welfare of Portugal rises by an amount equal to the trade creation effect ($8); there is no trade diversion effect since the customs union includes the world's lowest cost producer.

Suppose Portugal forms a custom union with France. Determine the trade creation effect and the trade diversion effect of the customs union. What is the customs union's overall effect on the welfare of Portugal?

Trade creation effect = $2, trade diversion effect = $2. The overall welfare of Portugal does not change.

A free trade area and a customs union differ in the way in which member nations treat imports from nonmember nations.

True

Advocates of the NAFTA hoped that a rise in Mexico exports to the United States would discourage labor from Mexico to the United States.

True

An optimal currency area is a region in which it is economically preferable to have a single official currency rather than multiple official currencies.

True

In terms of static economic analysis, if a customs union results in a large amount of trade diversion relative to trade creation, world welfare declines.

True

The European Union's variable levy is essentially a sliding-scale tariff applied to imports of agricultural products.

True

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

a common tax system and monetary union

When the NAFTA was being considered, American critics argued that it would likely result in

a loss of American jobs to Mexico

An objective of all of the members of the European Union has been to

abolish tariff and nontariff barriers to trade among member countries

The European Union has achieved all of the following except

adopted a common fiscal policy for member nations

According to the theory of optimal currency areas, there are gains to be achieved from sharing a currency across national boundaries. These gains include a. more uniform prices and lower transactions costs b. greater certainty for investors and enhanced competition c. a single monetary policy run by an independent central bank d. all of the above

all of the above

Countries pursuing membership in the European Monetary Union (Eurozone) are supposed to meet "convergence criteria" which include a. price stability b. low long-term interest rates c. sound governmental finances d. all of the above

all of the above

For the US, the political debate of joining NAFTA was very intense because of Mexico's a. relatively low wage levels b. relatively low levels of environmental enforcement c. relatively low standards for protecting workers d. all of the above

all of the above

The theory of optimal currency areas concludes that for a currency area to have the best chance of success a. workers in the affected country must be able to move freely to other countries b. prices and wages are flexible c. countries should have similar business cycles and economic structures d. all of the above

all of the above

Under the EU's Common Agricultural Policy, a variable import levy equals the

amount by which the EU's support price exceeds the world price

American critics of the NAFTA thought that it could

cause US companies to move to Mexico to benefit from lower labor costs

The European Union is an example of a/an

common market

When several countries jointly impose common external tariffs, eliminate tariffs on each other, and eliminate barriers to the movement of labor and capital among themselves, they have formed a/an

common market

The Common Agricultural Policy of the European Union has

decreased American farm exports to the EU

In terms of static economic analysis, if a customs union results in a small amount of trade creation relative to trade diversion, world welfare

decreases

Trade creation takes place when

economic integration results in a movement in product origin to a lower-cost member country

Trade diversion takes place when

economic integration results in a shift in product origin from a lower-cost, nonmember country to a member country having higher costs

Concerning the stages of economic integration, by the early 1990s, the EU had essentially reached the stage of a (an)

economic union

If several countries form a regional trading pact that removes tariffs between the members, implements a common external tariff structure, permits free mobility of factors of production, and integrates fiscal policies, they have formed a

economic union

A positive, dynamic effect of economic integration is illustrated by

economy-of-scale effect

As of 2002, the ____ became the official currency union of the European Monetary system

euro

Under the Common Agricultural Policy, exports of any surplus quantities of EU produce are encouraged through the usage of

export subsides

Regarding stages of economic integration, a free trade area

falls short of a customs union by excluding a common external tariff

A ____ is a regional trading block in which member countries eliminate internal trade barriers but maintain existing barriers against countries that are not members.

free trade area

If the United States and Canada implement a regional trading agreement that results in the two countries eliminating trade barriers between themselves while maintaining separate trade barriers against nonmembers countries, they have formed a

free trade area

NAFTA is essentially a

free trade area

Suppose that tomatoes from Mexico face a 20 percent tariff in the United States and a 25 percent tariff in Canada. If the United States and Canada maintain free trade between each other, these two countries belong to a

free trade area

The NAFTA is a

free trade area

Regarding stages of economic integration, a customs union

goes beyond a free trade area by including a common external tariff

Members of the EU find that "trade creation" is fostered when their economies are

highly competitive

As of 2016, 18 members of the European Union had adopted further economic integration than the other members by

implementing a common currency and a common monetary policy

Advocates of the North American Free Trade Agreement (NAFTA hopes that a (an) ____ in Mexican exports would ____ the migration of labor from Mexico to the United States.

increase; decrease

In terms of static economic analysis, if a customs union results in a large amount of trade creation relative to trade diversion, world welfare

increases

The formation of a regional trading block results in trade creation if

inefficient domestic production is replaced by more efficient production from another member country

American critics of the NAFTA thought that it could cause some US companies to move to Mexico to benefit from

lenient environment policies of the Mexican government

Relative to a regional trade agreement, a multilateral trade agreement may be more beneficial to global welfare in that it entails

less trade diversion

The implementation of the European Union has

made it harder for Americans to compete against the Germans in the British market

The European Monetary Union is an example of a

monetary union

Which level of economic integration best applies to the U.S. economy?

monetary union

Trade creation will more likely outweigh trade diversion for Country X that forms a customs union if the level of tariffs in Country X prior to the customs union is ____ and the total number of countries forming the customs union is ____.

relatively high; relatively large

A customs union that results in a sizable amount of ____ would be beneficial to global welfare.

trade creation

____ is said to exist when the formation of a regional trading group leads to an expansion of trade above regroup levels.

trade creation

When imports from a higher-cost supplier within a customs union replace imports from a lower-cost supplier outside the custom union, there exists

trade diversion

____ is said to exist when the formation of a regional trading group leads to the reduction of trade with nonmember countries in favor of member countries.

trade diversion

When the US was considering joining NAFTA, many economists predicted that the US factor of production that would be most harmed was

unskilled labor

Which factor of production in the United States is most likely to be made worse off (its factor payment will decrease) because of the North American Free Trade Agreement?

unskilled labor

The common agricultural policy of the EU supports its farmers through a system of

variable levies and export subsidies

Criticisms against the North American Free Trade Agreement include all of the following except

wages in the US will rise relative to Mexican wages