READING 17 INTERNATIONAL TRADE

Question 1

Which of the following best describes the concept of comparative advantage in international trade?
A. The ability of a country to produce a good at a lower absolute cost than another country.
B. The ability of a country to produce a good at a lower opportunity cost than another country.
C. The ability of a country to produce more of all goods than another country.

Answer 1

Correct Answer: B

Explanation:
Comparative advantage is defined as the ability to produce a good at a lower opportunity cost. This forms the basis of international trade.
Option A is incorrect because absolute advantage refers to lower absolute costs, not opportunity costs.
Option C is incorrect because it describes absolute advantage in all goods, which is not realistic or necessary for trade to be beneficial.

Question 2

What is the primary economic benefit of countries specializing in goods where they hold a comparative advantage?
A. Increase in government revenues through tariffs
B. Maximization of tax revenues from exports
C. Increased total output and wealth in all trading countries

Answer 2

Correct Answer: C

Explanation:
Specialization according to comparative advantage leads to a more efficient allocation of resources, boosting overall output and wealth.
Options A and B are incorrect as they focus on government revenue, which is not the main benefit of trade specialization.

Question 3

According to newer trade models, which of the following is NOT a benefit of international trade?
A. Decreased product variety for consumers
B. Economies of scale leading to lower costs
C. Improved quality from increased competition

Answer 3

Correct Answer: A

Explanation:
Newer models emphasize greater product variety, not decreased.
Options B and C are correct benefits of trade according to newer models.

Question 4

In a free trade setting, how does increased competition benefit consumers?
A. By reducing consumer choices
B. By increasing product prices
C. By improving quality and reducing prices

Answer 4

Correct Answer: C

Explanation:
More competition drives firms to improve quality and cut costs, benefiting consumers.
Options A and B reflect incorrect effects of competition.

Question 5

How can free trade reduce the pricing power of domestic monopolies?
A. By banning domestic monopolies
B. By increasing the number of domestic competitors
C. By introducing foreign competition into the market

Answer 5

Correct Answer: C

Explanation:
Free trade introduces international alternatives, reducing monopoly control.
A is unrealistic and not a trade-related policy. B may occur but is not a direct effect of free trade.

Question 5

Which of the following best explains the concept of economies of scale in international trade?
A. Trade policies that increase tariffs on imported goods
B. Cost savings from producing larger quantities for a global market
C. Reducing employment in domestic industries

Answer 5

Correct Answer: B

Explanation:
Economies of scale refer to cost reductions achieved by producing in larger volumes.
Option A describes trade restrictions, and C describes a possible cost, not a benefit.

Question 6

Which of the following is a common cost of free trade for an importing country?
A. Increased demand for local goods
B. Loss of jobs in industries that compete with imports
C. Increase in local wages

Answer 6

Correct Answer: B

Explanation:
Industries that cannot compete with cheap imports may lose jobs.
A and C are benefits, not typical costs.

Question 6

Why might domestic consumers benefit from international trade in monopolistic competition markets, like automobiles?
A. Because tariffs reduce consumer prices
B. Due to greater product variety and specialization
C. Because monopolies provide better service

Answer 6

Correct Answer: B

Explanation:
Consumers benefit from a wider selection of differentiated products.
A is incorrect; tariffs increase prices. C misrepresents monopolies.

Question 7

When an exporting country increases steel exports, what is a possible short-term domestic effect?
A. Decrease in demand for steel workers
B. Increase in domestic steel prices
C. Decline in steel company profits

Answer 7

Correct Answer: B

Explanation:
More exports can reduce domestic supply, raising prices.
A and C are unlikely as the industry is booming.

Question 8

How can lower labor costs in an exporting country impact the domestic economy of an importing country?
A. Increase domestic employment
B. Raise domestic wages
C. Decrease domestic employment and wages

Answer 8

Correct Answer: C

Explanation:
Cheaper foreign labor creates cost pressure on domestic firms, often leading to job and wage cuts.
A and B are incorrect as they misrepresent trade dynamics.

Question 9

What is the theoretical argument in favor of free trade despite its short-term costs?
A. Losers are never compensated, so inequality rises
B. Gainers can theoretically compensate losers, with net benefits for all
C. Protectionism leads to more growth long-term

Answer 9

Correct Answer: B

Explanation:
Economic theory supports trade by highlighting long-term net benefits.
A and C misrepresent trade theory and outcomes.

Question 10

Which of the following is an example of how international trade improves resource allocation?
A. Producing all goods domestically
B. Specializing in goods produced at lower opportunity costs
C. Subsidizing inefficient industries

Answer 10

Correct Answer: B

Explanation:
Trade allows countries to specialize and allocate resources where they are most productive.
A and C reduce efficiency.

Question 11

A country with a comparative advantage in textiles exports to a country with high labor costs. What is a likely result in the importing country?
A. Growth in the domestic textile industry
B. Job losses in the domestic textile industry
C. Higher prices for domestic textiles

Answer 11

Correct Answer: B

Explanation:
Domestic producers can’t compete with cheaper imports, leading to layoffs.
A and C do not reflect typical outcomes.

Question 12

How does monopolistic competition in global trade benefit consumers?
A. Through identical products from all producers
B. Through a lack of competition
C. Through variety in similar but differentiated goods

Answer 12

Correct Answer: C

Explanation:
Consumers gain access to unique styles and options.
A and B reflect perfect competition and monopoly characteristics.

Question 13

Which of the following best reflects the long-term outcome of free trade for displaced workers, according to trade theory?
A. They remain permanently unemployed
B. They transition into new industries with support and training
C. They receive permanent government subsidies

Answer 13

Correct Answer: B

Explanation:
Theory assumes workers can be reallocated with proper support.
A and C reflect possible realities but not the theoretical assumption.

Question 14

Which of the following is most likely to be supported by economists as a valid reason for imposing trade restrictions?
A. Protecting established domestic industries from foreign competition
B. Shielding infant industries to help them achieve economies of scale
C. Preserving domestic employment levels by restricting imports

Answer 14

Correct Answer: B

Explanation:
Infant industries may need protection in the early stages to develop competitive advantage and achieve economies of scale, an argument that has some support among economists.
Option A is incorrect because protecting established industries is often motivated by lobbying and leads to inefficiencies.
Option C is incorrect because while trade restrictions may preserve some jobs, they often destroy others and reduce overall welfare.

Question 15

A quota on imported goods is best described as:
A. A tax on each unit of imports collected by the government
B. A government subsidy given to exporters to lower their prices
C. A limit on the quantity of goods that can be imported in a given time

Answer 15

Correct Answer: C

Explanation:
A quota is a non-tariff barrier that limits the volume of imports, thus reducing foreign competition.
Option A refers to tariffs, not quotas.
Option B describes export subsidies, not import quotas.

Question 16

Which of the following trade restrictions is most likely to increase consumer prices while benefiting inefficient domestic producers?
A. Tariffs
B. Export subsidies
C. Voluntary export restraints

Answer 16

Correct Answer: A

Explanation:
Tariffs increase the price of imported goods, making domestic alternatives more attractive even if they are inefficient.
Option B often reduces prices abroad due to government support.
Option C may raise prices too, but the restriction is imposed by the exporting country voluntarily, not directly by the importer.

Question 17

A government policy requiring that at least 60% of the components in a product be sourced domestically is best classified as:
A. A voluntary export restraint
B. A minimum domestic content requirement
C. A quota

Answer 17

Correct Answer: B

Explanation:
This is a minimum domestic content requirement, aimed at boosting domestic industry participation.
Option A involves an agreement between countries.
Option C refers to quantity limits, not content sourcing.

Question 18

One drawback of tariffs compared to quotas is that:
A. Tariffs generate revenue for domestic producers
B. Quotas allow foreign producers to capture more profits
C. Tariffs provide certainty about the quantity of imports

Answer 18

Correct Answer: B

Explanation:
Quotas restrict supply, allowing foreign firms to charge higher prices and earn more profits.
Option A is incorrect because tariffs benefit governments, not producers directly.
Option C is incorrect because quotas, not tariffs, cap quantities.

Question 19

Which argument for trade protection is most closely tied to national defense concerns?
A. Dumping prevention
B. National security
C. Export subsidies

Answer 19

Correct Answer: B

Explanation:
National security is a widely accepted rationale when trade restrictions are used to ensure domestic capacity for essential goods.
Option A is about unfair pricing tactics.
Option C is aimed at supporting exporters, not protecting strategic industries.

Question 20

Export subsidies are most likely to:
A. Raise prices in the domestic market
B. Distort international trade by making domestic exports artificially cheap
C. Increase domestic competition from foreign firms

Answer 20

Correct Answer: B

Explanation:
Export subsidies lower the cost of goods sold abroad, distorting market dynamics and potentially triggering retaliatory measures.
Option A is incorrect because export subsidies lower foreign prices.
Option C is incorrect because subsidies help domestic firms compete abroad.

Question 21

Which of the following scenarios best describes dumping?
A. A country reduces tariffs to attract foreign investment
B. A firm sells goods in a foreign market below production cost
C. A government restricts exports to protect domestic supply

Answer 21

Correct Answer: B

Explanation:
Dumping is when a firm sells below cost to drive out competition, which is considered unfair trade.
Option A is a liberalization strategy, not dumping.
Option C describes a voluntary export restraint, not dumping.

Question 22

Which of the following is least supported by economists as a justification for trade protection?
A. National security
B. Infant industry support
C. Retaliation against foreign trade barriers

Answer 22

Correct Answer: C

Explanation:
Retaliation often leads to trade wars, which harm both countries. It’s a political move, not an economic one.
Option A has support for critical industries.
Option B is accepted when the long-term benefits outweigh the short-term costs.

Question 23

In the long run, the economic cost of protecting domestic industries with trade barriers is: A. Higher productivity across sectors B. Improved international competitiveness C. Reduced consumer welfare and economic efficiency

Answer 23

Correct Answer: C Explanation: Trade barriers typically lead to higher prices, misallocation of resources, and lower welfare. Options A and B would occur under free trade, not protectionism.

Question 24

A country wants to avoid a formal tariff imposed by a trade partner. It agrees to limit exports voluntarily. This is an example of: A. Voluntary export restraint B. Export subsidy C. Quota

Answer 24

Correct Answer: A Explanation: A voluntary export restraint (VER) is a self-imposed limit by the exporter to avoid penalties. Option B involves government support. Option C is a restriction imposed by the importing country.

Question 25

Which trade restriction is most similar in effect to a tariff, but does not raise revenue for the government? A. Export subsidy B. Quota C. Minimum domestic content requirement

Answer 25

Correct Answer: B Explanation: A quota restricts quantity, similar to a tariff's effect on prices, but does not generate tax revenue. Option A lowers export prices. Option C influences production sourcing, not prices or quantity.

Question 26

Which of the following best explains why dumping can hurt domestic industries? A. It increases export demand for local goods B. It allows foreign producers to dominate the market by pricing below cost C. It results in higher import tariffs on domestic goods

Answer 26

Correct Answer: B Explanation: Dumping involves pricing below cost, which forces domestic firms to either lower prices unsustainably or exit the market. Option A is incorrect because it refers to export benefits. Option C is reversed. tariffs are imposed on foreign goods, not domestic ones.

Question 27

Which of the following best describes the immediate impact of a tariff imposed on a good in a small importing country? A. Domestic price falls, imports increase B. Domestic price rises, imports decrease C. Domestic price remains unchanged, exports increase

Answer 27

Correct Answer: B Explanation: Correct: A tariff increases the domestic price of the good, leading to a decrease in imports. Incorrect A. A tariff does not lower domestic prices or increase imports; it does the opposite. Incorrect C. A tariff affects imports, not exports, and it raises domestic prices.

Question 28

A quota that is equivalent to a tariff will result in: A. A lower domestic price than the tariff B. The same reduction in imports as the tariff C. A larger increase in consumer surplus

Answer 28

Correct Answer: B Explanation: Correct. By definition, an equivalent quota reduces imports by the same amount as the tariff. Incorrect A. The domestic price will rise to the same level under both. Incorrect C. Both policies reduce consumer surplus; neither increases it.

Question 29

The deadweight loss from a trade restriction represents: A. A transfer of income to domestic producers B. A net loss of economic welfare C. The gain to the domestic government

Answer 29

Correct Answer: B Explanation: Correct. Deadweight loss reflects lost efficiency, where potential gains from trade are not realized. Incorrect A. Transfers occur, but deadweight loss is not a transfer—it’s a total loss. Incorrect C. Government gains only from tariff revenue, not from deadweight loss.

Question 30

Which of the following statements about consumer surplus under a tariff or quota is most accurate? A. Consumer surplus increases due to a higher domestic price B. Consumer surplus is unaffected by trade restrictions C. Consumer surplus decreases due to the higher domestic price

Answer 30

Correct Answer: C Explanation: Correct. Consumers pay higher prices and consume less, reducing their surplus. Incorrect A. Surplus decreases with higher prices. Incorrect B. Trade restrictions directly impact consumer surplus

Question 31

A voluntary export restraint (VER) is most similar in effect to: A. A tariff with government revenue B. A quota without import license revenue C. An export subsidy for domestic consumers

Answer 31

Correct Answer: B Explanation: Correct: VERs limit quantity like quotas but often lack license revenue—thus similar to quotas without government revenue. Incorrect A. VERs generate no revenue for the importing government. Incorrect C. VERs protect domestic producers, not consumers, and are not subsidies.

Question 32

Quota rents refer to: A. Payments made by foreign producers for licenses B. Gains captured by foreign exporters when licenses are free C. Deadweight losses to domestic consumers

Answer 32

Correct Answer: B Explanation: Correct: When foreign exporters get licenses for free, they capture the price markup as quota rents. Incorrect A. This describes government revenue if licenses are sold. Incorrect C. Deadweight loss is different from quota rents.

Question 33

Which of the following effects is shared by tariffs, quotas, and VERs in a small country? A. Increase in imports B. Decrease in consumer surplus C. Decrease in domestic quantity supplied

Answer 33

Correct Answer: B Explanation: Correct. All these restrictions reduce imports, raise prices, and lower consumer surplus. Incorrect A. They reduce imports, not increase them. Incorrect C. They increase domestic quantity supplied.

Question 34

Which of the following groups always benefits from a tariff imposed in a small country? A. Domestic consumers B. Foreign exporters C. Domestic producers

Answer 34

Correct Answer: C Explanation: Correct. Domestic producers benefit from the higher prices and increased market share. Incorrect A. Consumers face higher prices and reduced choices. Incorrect B. Foreign exporters sell less and may earn less.

Question 35

When a quota is imposed and the domestic government does not charge for import licenses, the main economic impact is: A. Quota rents accrue to domestic producers B. Quota rents are lost as deadweight loss C. Quota rents go to foreign exporters

Answer 35

Correct Answer: C Explanation: Correct. Without charging for licenses, foreign exporters who receive them benefit from the higher prices. Incorrect A. Domestic producers benefit from higher prices but don’t receive quota rents. Incorrect B. Rents are not deadweight loss if captured by someone.

Question 35

In a small exporting country, an export subsidy will likely: A. Raise domestic consumer surplus B. Lower domestic prices C. Raise domestic prices and lower consumer surplus

Answer 35

Correct Answer: C Explanation: Correct. The subsidy encourages exports, reducing domestic supply and raising prices. Incorrect A. Consumers face higher prices. Incorrect B. Prices rise, not fall.

Question 36

Which of the following is an outcome of imposing an import quota? A. Increase in domestic consumption B. Increase in domestic production C. Increase in total imports

Answer 36

Correct Answer: B Explanation: Correct. Domestic production increases due to reduced foreign competition and higher prices. Incorrect A. Higher prices reduce consumption. Incorrect C. Quotas restrict imports.

Question 37

The total loss in welfare due to a tariff in a small country is composed of: A. Tariff revenue plus consumer surplus B. Producer surplus minus consumer surplus C. Two triangles representing deadweight loss

Answer 37

Correct Answer: C Explanation: Correct. These two triangles represent the inefficiencies in production and consumption caused by the tariff. Incorrect A. Tariff revenue is a gain, not part of the welfare loss. Incorrect B. This doesn’t isolate welfare loss properly.

Question 38

Which of the following is true about export subsidies in large exporting countries? A. They increase world prices B. They decrease world prices and help foreign consumers C. They have no effect on foreign markets

Answer 38

Correct Answer: B Explanation: Correct. Large exporters can shift global supply, lowering world prices and benefiting foreign consumers. Incorrect A. Prices fall, not rise, globally. Incorrect C. Large countries do affect global prices.

Question 39

A trade restriction that reduces the world price can potentially increase national welfare in: A. Small importing countries B. Large importing countries C. Small exporting countries

Answer 39

Correct Answer: B Explanation: Correct. Large importers can influence world prices by reducing demand, possibly benefiting overall. Incorrect A. Small countries take prices as given. Incorrect C. Exporters may hurt themselves with restrictions.

Question 40

In the context of trade restrictions, the term “producer surplus” most accurately refers to: A. The total sales revenue of domestic producers B. The revenue collected by government from tariffs C. The benefit producers receive from selling at higher prices than their minimum acceptable price

Answer 40

Correct Answer: C Explanation: Correct. Producer surplus is the extra benefit producers get from selling at prices above their costs. Incorrect A. This is total revenue, not surplus. Incorrect B. That’s government revenue, not producer surplus.

Question 41

Deadweight loss in trade restrictions is least likely to be: A. Recoverable if trade is liberalized B. A loss in consumer surplus C. A net loss in total welfare

Answer 41

Correct Answer: B Explanation: Correct: Deadweight loss is distinct from consumer surplus loss—it’s the unrecoverable efficiency loss. Incorrect A: Reopening trade can recover some losses. Incorrect C: It is, by definition, a net welfare loss.

Question 42

If a domestic government collects the full value of import licenses under a quota, the economic effect is equivalent to: A. A tariff B. An export subsidy C. A VER

Answer 42

Correct Answer: A Explanation: Correct. When the government captures license revenue, the quota acts like a tariff. Incorrect B. Export subsidies are a different mechanism. Incorrect C. VERs do not provide government revenue.

Question 43

All else equal, which of the following would lead to the greatest national welfare loss in a small country? A. A quota with government sale of licenses B. A VER C. A tariff with equivalent impact

Answer 43

Correct Answer: B Explanation: Correct. VERs result in quota rents accruing to foreign exporters, with no government revenue—thus more welfare lost. Incorrect A and C. Both provide revenue to the domestic government, reducing the net welfare loss.

Question 44

Which policy involves payments to domestic exporters to encourage exports? A. Tariff B. Export subsidy C. Import quota

Answer 44

Correct Answer: B Explanation: Correct. Export subsidies are direct government payments to exporters. Incorrect A. Tariffs tax imports. Incorrect C. Quotas restrict imports, not encourage exports.

Question 45

Under which trade restriction do foreign exporters gain quota rents if the domestic government does not charge for import licenses? A. Tariff B. Quota C. Export subsidy

Answer 45

Correct Answer: B Explanation: Correct. If licenses are free, foreign exporters benefit from selling at higher prices. Incorrect A. Tariffs generate revenue for the government, not rents for exporters. Incorrect C. Subsidies benefit domestic exporters.

Question 46

Which of the following is an example of a capital restriction imposed by a country? A. Allowing foreign investment in all industries without limitation B. Prohibiting foreign investments in certain domestic industries C. Providing tax incentives for domestic investors abroad

Answer 46

Correct Answer: B Explanation: Capital restrictions can include prohibiting foreign investments in specific domestic industries to protect sensitive sectors. Option B correctly describes this. Option A is incorrect because allowing unrestricted foreign investment is the opposite of a capital restriction. Option C relates to incentives rather than restrictions on capital flows.

Question 47

How do capital restrictions generally affect a country's economic welfare? A. They tend to increase economic welfare by promoting free capital flow. B. They tend to decrease economic welfare by limiting efficient capital allocation. C. They have no impact on economic welfare.

Answer 47

Correct Answer: B Explanation: Capital restrictions limit the free movement of capital, reducing efficiency and lowering overall economic welfare. Option A is incorrect because free capital flow, not restrictions, promotes welfare. Option C is incorrect as capital restrictions do impact welfare.

Question 48

In the short term, capital restrictions in developing countries can help by: A. Encouraging excessive foreign capital inflows. B. Avoiding the negative effects of large foreign capital inflows and outflows. C. Ensuring complete exclusion from international capital markets.

Answer 48

Correct Answer: B Explanation: In the short term, capital restrictions can shield developing countries from volatile swings in foreign capital inflows and outflows that can destabilize the economy. Option A is incorrect because restrictions limit, not encourage, excessive inflows. Option C is incorrect because restrictions aim to control flows, not completely exclude markets.

Question 49

Which of the following best describes a restriction on repatriation of earnings? A. Foreign firms are required to reinvest all profits locally. B. Foreign firms are allowed to transfer all profits abroad without limit. C. Foreign firms face no restrictions on dividend payments.

Answer 49

Correct Answer: A Explanation: Restrictions on repatriation prevent foreign firms from freely sending profits abroad, often requiring reinvestment locally. Option B and C are incorrect as they describe no restrictions.

Question 50

A country imposes a tax on income earned by its citizens on foreign investments. This is an example of: A. A capital inflow restriction B. A capital outflow restriction C. An open capital market

Answer 50

Correct Answer: B Explanation: Taxing income from foreign investments limits capital leaving the country, so it is a capital outflow restriction. Option A is incorrect because inflow restrictions relate to foreign capital entering. Option C is incorrect as the tax is a form of restriction.

Question 51

Which of the following statements about capital restrictions and international financial markets is most accurate? A. Capital restrictions have no impact on a country’s access to international capital markets. B. Long-term capital restrictions may result in exclusion from international capital markets. C. Capital restrictions guarantee stable access to global capital regardless of market conditions.

Answer 51

Correct Answer: B Explanation: Long-term restrictions may deter foreign investors, risking exclusion from international capital markets. Option A is incorrect as restrictions influence access. Option C is incorrect because restrictions do not guarantee stable access.

Question 52

Why might a developing country temporarily implement capital restrictions? A. To promote short-term economic volatility B. To protect against sudden capital flight during market panic C. To permanently block all foreign investments

Answer 52

Correct Answer: B Explanation: Capital restrictions can help protect the economy from sudden large outflows of capital in periods of panic or market instability. Option A is incorrect because volatility is usually undesirable. Option C is incorrect as restrictions are often temporary.

Question 53

Which of the following is NOT a common form of capital restriction? A. Outright prohibition of foreign investment in specific industries B. Tax incentives for domestic investors to invest abroad C. Limits on how much foreign investors can repatriate in profits

Answer 53

Correct Answer: B Explanation: Tax incentives encourage capital flows abroad rather than restrict them. Options A and C are common capital restrictions.

Question 54

Capital restrictions that prohibit foreign investment in a domestic country: A. Encourage capital inflows and increase market efficiency B. Protect certain industries but may reduce access to foreign capital C. Always improve long-term economic growth

Answer 54

Correct Answer: B Explanation: While protecting sensitive industries, such restrictions can reduce access to foreign capital, possibly limiting growth. Option A is incorrect because prohibitions discourage inflows. Option C is incorrect as restrictions may hurt long-term growth.

Question 55

Which of the following best explains why capital restrictions can lead to deadweight losses? A. They improve market efficiency by encouraging competition. B. They limit the free movement of capital, reducing overall economic efficiency. C. They generate government revenue without affecting market outcomes.

Answer 55

Correct Answer: B Explanation: Restrictions reduce efficient allocation of capital, leading to losses in economic welfare (deadweight losses). Option A is incorrect because restrictions reduce, not improve efficiency. Option C is incorrect as restrictions impact market outcomes.

Question 56

Which of the following best describes the primary motivation behind forming trading blocs? A. To increase government control over domestic industries B. To reduce trade barriers and enhance economic efficiency C. To create trade restrictions against non-member countries

Answer 56

Correct Answer: B Explanation: Reducing trade barriers allows countries to benefit from comparative advantage and increased competition, leading to economic efficiency. A is incorrect because trading blocs typically reduce, not increase, government control over trade. C is incorrect because while some agreements may create common external barriers, the primary motivation is increased intra-bloc trade.

Question 57

A key benefit of trading blocs is: A. Decreased competition within member states B. Increased access to markets for member countries C. Protection of inefficient industries

Answer 57

Correct Answer: B Explanation: Trading blocs open up member markets, enhancing export and import opportunities. A is incorrect because competition usually increases within the bloc. C is incorrect because the goal is efficiency, not protection of inefficiencies.

Question 58

What is the primary negative effect of reducing trade restrictions? A. Decreased government tax revenue B. Devaluation of currency C. Disruption to certain firms and workers

Answer 58

Correct Answer: C Explanation: Reduced barriers hurt firms in less competitive industries and workers may lose jobs. A is not the primary issue; governments often adjust revenue structures. B is not a direct result of trade liberalization.

Question 59

According to economic theory, what is the overall impact of reducing trade restrictions? A. Economic welfare is harmed due to competition B. Economic welfare is improved, though some groups may suffer C. No change in economic welfare

Answer 59

Correct Answer: B Explanation: Trade liberalization improves overall efficiency and welfare but not equally across all groups. A is incorrect; competition usually increases productivity. C ignores the positive gains from comparative advantage.

Question 60

What happens when a trade agreement causes a country to switch from a low-cost nonmember to a high-cost member source of imports? A. Trade creation B. Trade diversion C. Comparative advantage

Answer 60

Correct Answer: B Explanation: Trade diversion occurs when a less efficient member replaces a more efficient nonmember due to new trade rules. A is incorrect; trade creation refers to efficient trade due to reduced internal barriers. C is a broader concept, not specific to this scenario.

Question 61

Which of the following best describes a Free Trade Area? A. No internal barriers; common external trade policy B. No internal barriers only C. Shared economic policy and currency

Answer 61

Correct Answer: B Explanation: Free Trade Areas eliminate trade barriers among members but do not coordinate external policies. A describes a customs union. C describes a monetary union.

Question 62

Which of the following is the primary economic motivation for forming a trading bloc? A. Promoting currency union B. Increasing imports from nonmember countries C. Reducing trade barriers among member countries

Answer 62

Correct Answer: C Explanation: C is correct. The main purpose of a trading bloc is to reduce or eliminate trade barriers (tariffs, quotas) among member countries to boost trade. A is incorrect. Currency union is a more advanced stage (monetary union), not the primary aim of a trading bloc. B is incorrect. Trading blocs often increase restrictions on nonmember countries, not decrease them.

Question 63

Which of the following best describes a customs union? A. Free trade among members with individual external tariffs B. Free trade among members and a common external tariff C. Common institutions and monetary policy

Answer 63

Correct Answer: B Explanation: B is correct. A customs union removes internal trade barriers and sets a common trade policy toward nonmembers. A is incorrect. Describes a free trade area, not a customs union. C is incorrect. Refers to an economic or monetary union, which goes beyond a customs union.

Question 64

Which type of regional trade agreement allows free movement of labor and capital among member countries? A. Free trade area B. Common market C. Customs union

Answer 64

Correct Answer: B Explanation: B is correct. A common market allows free trade and also free movement of labor and capital. A is incorrect. Free trade area does not include free movement of labor and capital. C is incorrect. Customs union involves a common external tariff, not labor/capital mobility.

Question 65

The main advantage of regional trade agreements (RTAs) is: A. Restriction of imports from nonmember countries B. Encouragement of monopolistic markets C. Increased trade based on comparative advantage

Answer 65

Correct Answer: C Explanation: C is correct. RTAs allow countries to specialize in producing goods where they have a comparative advantage, increasing overall efficiency and welfare. A is incorrect. While this may happen, it is a disadvantage, not an advantage. B is incorrect. RTAs promote competition, not monopolies.

Question 66

Which of the following statements is most accurate regarding economic unions? A. Economic unions include a common currency by definition B. Economic unions include coordinated economic policies C. Economic unions do not allow free movement of labor

Answer 66

Correct Answer: B Explanation: B is correct. Economic unions coordinate economic policies and establish common institutions. A is incorrect. A common currency is a feature of a monetary union, not an economic union by default. C is incorrect. Economic unions allow free movement of labor and capital.

Question 67

Which of the following regional trading arrangements represents the highest level of economic integration? A. Customs union B. Monetary union C. Common market

Answer 67

Correct Answer: B Explanation: B is correct. A monetary union includes all aspects of integration and adds a shared currency. A is incorrect. Customs union is less integrated—no common labor or monetary policy. C is incorrect. Common market allows factor mobility but lacks unified economic policy and currency.

Question 68

The European Union (EU) is best classified as: A. Free trade area B. Economic union C. Monetary union

Answer 68

Correct Answer: B Explanation: B is correct. The EU coordinates economic policies and institutions, qualifying it as an economic union. A is incorrect. The EU has deeper integration than a free trade area. C is incorrect. Not all EU members use the euro, so it’s not a monetary union as a whole.

Question 68

Which of the following is an example of a monetary union? A. Mercosur B. ASEAN C. Eurozone

Answer 68

Correct Answer: C Explanation: C is correct. Eurozone members use a single currency (euro) and share monetary policy. A is incorrect. Mercosur is a customs union. B is incorrect. ASEAN is a loose economic grouping without unified currency or full integration.

Question 69

A free trade area differs from a customs union in that it: A. Allows for a shared currency B. Does not require a common trade policy with nonmembers C. Allows free movement of labor and capital

Answer 69

Correct Answer: B Explanation: B is correct: Free trade areas don’t adopt a common external policy; each country sets its own. A is incorrect: Shared currency is part of a monetary union. C is incorrect: Labor and capital movement is a feature of a common market.

Question 70

A potential disadvantage of a trading bloc is: A. Reduced efficiency due to lack of competition B. Trade diversion from low-cost nonmembers to high-cost members C. Higher labor mobility among member countries

Answer 70

Correct Answer: B Explanation: B is correct. If cheaper goods from nonmembers are replaced by more expensive goods from members, trade diversion harms welfare. A is incorrect. Trading blocs increase competition. C is incorrect. Labor mobility is typically an advantage, not a disadvantage.

Question 71

Why might economic welfare decline after forming a trading bloc? A. Reduction in competition among member firms B. Increase in trade barriers with nonmember countries C. Elimination of comparative advantage

Answer 71

Correct Answer: B Explanation: B is correct. If external trade barriers rise, cheaper nonmember imports are blocked, possibly reducing efficiency. A is incorrect. Competition usually increases. C is incorrect. Comparative advantage is not eliminated; it’s enhanced in most cases.

Question 72

Which is a feature unique to a monetary union? A. Free trade in goods and services B. Common economic policies C. Single currency across member countries

Answer 72

Correct Answer: C Explanation: C is correct. A monetary union includes a single currency, like the euro in the Eurozone. A is incorrect. Found in all lower-level trade blocs. B is incorrect. Shared policies occur at the economic union stage.

Question 73

Which of the following outcomes is expected from a common market? A. Reduced capital flows B. Increased labor mobility C. Shared currency

Answer 73

Correct Answer: B Explanation: B is correct. A common market enables free movement of labor and capital. A is incorrect. Capital flows increase, not decrease. C is incorrect. A shared currency is part of a monetary union, not a common market

Question 74

Why are regional trade agreements formed? A. To reduce political cooperation B. To raise tariffs between members C. To increase economic welfare through trade

Answer 74

Correct Answer: C Explanation: C is correct. The main motivation is to boost welfare by enabling efficient trade. A is incorrect. RTAs often strengthen political ties. B is incorrect. RTAs reduce, not raise, internal trade barriers.

Question 75

A region where countries share a central bank and currency is a: A. Free trade area B. Monetary union C. Common market

Answer 75

Correct Answer: B Explanation: B is correct. Shared central bank and currency = monetary union (e.g., Eurozone). A is incorrect. No currency or monetary integration. C is incorrect. Allows factor movement but not a shared currency.

Question 76

What is a positive outcome of increased competition due to a trading bloc? A. Inefficiency in production B. Pressure on firms to innovate and cut costs C. Reduced consumer choices

Answer 76

Correct Answer: B Explanation: B is correct. More competition means firms must become more efficient and innovative. A is incorrect. Competition increases efficiency. C is incorrect. Consumer choices usually expand.

Question 77

What typically happens to prices and availability when a country joins a free trade area? A. Prices increase and goods become scarcer B. Prices fall and more goods become available C. No change in market dynamics

Answer 77

Correct Answer: B Explanation: B is correct. Trade liberalization often leads to lower prices and greater variety. A is incorrect. Trade barriers cause price increases, not reductions. C is incorrect. Market conditions change significantly.

Question 78

Which is NOT a feature of an economic union? A. Common monetary policy B. Common trade policy C. Free movement of labor

Answer 78

Correct Answer: A Explanation: A is correct. Monetary policy integration belongs to a monetary union. B is incorrect. Economic unions adopt shared trade policies. C is incorrect. Economic unions allow labor movement.

Question 79

If a trade agreement leads to more expensive imports from member countries, this is: A. Trade creation B. Trade diversion C. Comparative advantage

Answer 79

Correct Answer: B Explanation: B is correct. Trade diversion occurs when cheaper imports from nonmembers are replaced by costlier ones from members. A is incorrect. Trade creation benefits efficiency by shifting production to more efficient members. C is incorrect. Comparative advantage is the basis for trade, not the result of this scenario.