Chapter 7 – Economic Integration
Multiple Choice:
___________________ provide reduced barriers on trade among participating nations than on trade with nonmember nations.
A)Free trade areas
B)Common markets
C)Customs unions
D)Preferential trade arrangements
Answer: D pg. 173
2. Which of the following represents theloosestform of economic integration?
A)Preferential trade arrangement
B)Customs union
C)Common market
D)Free trade area
Answer: A pg. 173
3. The British Commonwealth Preference Scheme is an example of a(n):
A) free trade area
B)customs union
C)preferential trade arrangement
D)common market
Answer: B pg. 173
4.A ____________________ is the form of economic integration wherein all barriers are removed on trade among members, but each nation retains its own barriers to trade with nonmembers.
A)preferential trade arrangements
B)customs union
C)common market
D)free trade area
Answer: D pg. 173
5.A _________________ allows no tariffs or other barriers on trade among members, and it harmonizes trade policies toward the rest of the world.
A)Preferential trade arrangements
B)Customs union
C)Common market
D)Free trade area
Answer: B pg. 173
Benelux is an example of a(n):
A)preferential trade arrangement
B)customs union
C)common market
D)economic union
Answer: D pg. 174
A(n) ________________ is a group of nations with common monetary and fiscal policies in addition to the characteristics of a common market.
A)Preferential trade arrangement
B)Economic union
C)Common market
D)Free trade area
Answer: B pg. 174
Which of the following represents thehighestform of economic integration?
A)Customs union
B)Common market
C)Economic union
D)Preferential trade arrangements
Answer: C pg. 174
9. Areas set up to attract foreign investments by allowing the importation of raw and intermediate materials without paying tariffs are called:
A) Customs unions
B) Duty-free zones
C) free trade area
D) Economic unions
Answer: B pg. 174
10. The replacement of high cost production processes with lower cost imports from a member nation, as a result of the formation of a regional trade arrangement, is called:
A) trade creation
B) trade diversion
C) economies of scale
D) dynamic trade effect
Answer: A pg. 174
11. The static welfare effects resulting from the formulation of customs unions are measured by the extent to which it leads to ___________ and ____________.
A)trade creation, trade diversion
B)economies of scale, free trade
C)dynamic effects, trade diversion
D)dynamic effects, trade creation
Answer: A pg. 174
12.With free trade, the supply curve for the domestic country will be:
A)perfectly inelastic
B)perfectly elastic
C)upward sloping
D)downward sloping
Answer: B pg. 174
13.______________ occur(s) when lower-cost imports from outside the union are replaced by higher-cost imports from another union member.
A) Trade creation
B) Trade diversion
C) Economies of scale
D) Increasing opportunity costs
Answer: B pg. 175
14._______________ occurs when some domestic production in a member of the customs union is replaced by lower-cost imports from another member nation.
A) Trade creation
B) Trade diversion
C) Economies of scale
D) Decreasing returns to scale
Answer: A pg. 174
15.Trade creation will ________________ for the domestic country.
A)decrease welfare
B)increase welfare
C)have no effect on welfare
D)initially increase, then decrease welfare
Answer: B pg. 174
16. Trade diversion will ______________ for the domestic country.
E)decrease welfare
F)increase welfare
G)have no effect on welfare
H)initially increase, then decrease welfare
Answer: A pg. 175
17. Which of the following are examples of dynamic benefits of the formation of customs unions?.
A) increased competition
B) stimulus to investment
C)better utilization of economic resources
D)all of the above
Answer: D pg. 177
18. Suppose that apples from Japan face a 15% tariff in Germany and a 20% tariff in Italy, while Germany and Italy maintain free trade between each other. Germany and Italy are therefore part of a(n):
A) Free trade area
B) Customs union
C) common market
D) economic union
Answer: A pg. 173
19. Direct investments made in a nation or other economic units to avoid import tariffs are known as:
A) tariff factories
B) tariff diversion
C) tariff creation
D) duty-free zones
Answer: A pg. 177
20. The ____________________ was founded by the Treaty of Rome, signed in March 1957 by West Germany, France, Italy, Belgium, the Netherlands, and Luxembourg, and came into being on January 1, 1958.
A) NAFTA
B) European Union (EU)
C) Variable import levies
D) European Economic Area (EEA)
Answer: B pg. 178
21. A dynamic welfare gain resulting from the formation of a customs union would be:
A) trade diversion
B) trade creation
C)diseconomies of scale
D)economies of scale
Answer: D pg. 177
22. Which of the following barriers are imposed by the EU to equalize the price of imported agricultural products and agricultural prices set by the EU.
A) orderly market agreements
B) export quotas
C) variable import levies
D) import quotas
Answer: C pg. 178
23. As a result of their high farm support price level, the EU has experienced:
A) high agricultural surpluses, high storage costs, and subsidized exports
B) low agricultural surpluses, and low storage costs
C) non-subsidized exports among the agricultural industry
D) economies of scale in agricultural
Answer: A pg. 178
24. ______________ resulting from the formation of a customs union tend(s) to be five to six times larger than ______________, thus providing incentive for the United Kingdom to join the EU in 1973.
A) Static gains, dynamic gains
B) Trade creation, trade diversion
C)Dynamic gains, welfare gains
D)Dynamic gains, static gains
Answer: D pg. 178
25. Which of the following significant change with respect to the development of the European Union took place in January, 1993, as a result of theSingle European Act?
A)Becoming a single unified market by removing the restrictions on the free flow of goods, services, and resources among its members
B)Adopting a common currency for the members
C)Forming supranational fiscal and monetary agencies
D)Becoming an economic union
Answer: A pg. 180
26.Which free trade area was formed in 1960 by the United Kingdom, Austria, Denmark, Norway, Portugal, Sweden, and Switzerland?
A)European Economic Area (EEA)
B)European Free Trade Association (EFTA)
C)North American Free Trade Agreement (NAFTA)
D)Southern Common Market (Mercosur)
Answer: B pg. 182
27.Trade deflection is most likely to occur in which of the following?
A)Preferential trade agreement
B)Customs union
C)Free trade area
D)Monetary union
Answer: C pg. 182
28.The North American Free Trade Area (NAFTA) would have been most strongly opposed by US:
A)electronics manufacturers
B)labor unions
C)commercial banks
D)engineering companies
Answer: A pg. 184
29.In September, 1993, __________________ signed the North American Free Trade Agreement (NAFTA).
A)the US and Canada
B)the US, Mexico and Central America
C)the US, Canada and Mexico
D)the US, Canada and Greenland
Answer: C pg. 183
30.The United States benefits from NAFTA include:
A)Increased competition in product markets
B)Increased competition in resource markets
C)Lower price of many U.S commodities
D)All of the above
Answer: D pg. 183
31. Free trade access to Mexico allows the US industries to import __________________ from Mexico and maintain other operations in the US rather than risking the loss of all jobs in the industry to low-wage countries.
A)labor-intensive components
B)technology
C)capital-intensive components
D)textiles
Answer: A pg. 184
32. At the time of the NAFTA agreement, who was the United States’ largest trading partner?
A) Canada
B)Japan
C)Mexico
D)England
Answer: A pg. 183
33. When was the EFTA (European Free Trade Association) formed?
A)1960
B)1940
C)1970
D)1965
Answer: A pg. 182
34.The ___________________ was formed by Argentina, Brazil, Paraguay, and Uruguay in 1991.
A)European Economic Area (EEA)
B)European Free Trade Association (EFTA)
C)North American Free Trade Agreement (NAFTA)
D)Southern Common Market (Mercosur)
Answer: D pg. 185
35.The organization of Communist bloc nations formed by the Soviet Union in 1949 to divert trade from Western nations and achieve a greater degree of self-sufficiency among Communist nations was the:
A)European Economic Area (EEA)
B)Council of Mutual Economic Assistance (CMEA)
C)North American Free Trade Agreement (NAFTA)
D)Southern Common Market (Mercosur)
Answer: B pg. 186
36.In the CMEA member countries, international transactions were controlled through ______________________.
A)duty-free zones
B)state trading companies
C)centrally planned economies
D)bilateral agreements
Answer: B pg. 186
37.Economies in which the government owns factors of production and determines prices are known as:
A)Mixed market economies
B)state trading companies
C)centrally planned economies
D)market economies
Answer: C pg. 186
38.An agreement between two nations regarding quantities and terms of specific trade transactions is known as:
A)A preferential trade agreement
B)A voluntary export restraint
C)A free trade area
D)a bilateral agreement
Answer: D pg. 189
39.Which of the following involves purchasing a specified quantity of a commodity for a year or more from a state trading company of another nation?
A)Bulk purchasing agreement
B)Bilateral agreement
C)Voluntary export restraint
D)Preferential trade agreement
Answer: A pg, 189
40.The agreement among the Baltic States of Estonia, Latvia, and Lithuania is known as:
A)the Commonwealth of Independent States ( CIS)
B)the Central European Free Trade Association (CEFTA)
C)the Baltic States Free Trade Area (BFTA)
D)the European Union (EU)
Answer: C pg. 190
True/False:
41. True or False? An economic union is the most robust form of economic integration.
Answer: True pg. 174
42 . True or False? The formation of a customs union generates static effects for members, but not dynamic effects.
Answer: False pg. 174
43. True or False? Customs unions tend to reduce the level of competition among member nations.
Answer: False pg. 177
44.True or False? Armenia , Estonia, and Georgia are not Newly Independent States (NIS).
Answer: False pg. 189
45. True or False? The European Union became a common market in 1993 by allowing free movement of labor and capital among member nations.
Answer: True pg. 173
46. True or False? The value-added-tax system is one in which a tax is levied at each stage of production and then ultimately passed on to the consumer.
Answer: True pg. 180
47. True or False? After the customs union is formed and trade barriers among the member nations are enacted, the member nations may become less efficient due to the joined union.
Answer: False pg. 176
48. True or False? Early in the EU’s history, the union had no tariffs on items traded with developing countries.
Answer: False pg. 180
49. True or False? Trade deflection is a problem for customs unions.
Answer: False pg. 182
Essay:
50. List and briefly describe, from loosest to tightest, the five types of economic integration:
Preferential trade arrangementswhich provides lower barriers on trade among participating nations than on trade with nonmember nations. This is the loosest form of economic integration.
Free trade areais the form of economic integration wherein all barriers are removed on trade among members, but each nation retains its own barriers to trade with nonmembers.
Customs unionallows no tariffs or other barriers on trade among members, and in addition it harmonizes trade policies toward the rest of the world.
Common marketgoes beyond a customs union by also allowing the free movement of labor and capital among member nations.
Economic uniongoes still further by harmonizing or even unifying the monetary and fiscal polices of member states, this is the highest form of economic integration.
