14 chapter 9 regional trading arrangements t f 21

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Chapter 9: Regional Trading Arrangements T F 21. 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. T F 22. For countries forming a customs union, the trade-creation effect represents a welfare loss and the trade-diversion effect represents a welfare gain. T F 23. 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. T F 24. 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. T F 25. If a customs union includes the low-cost supplier of the world, there would be no adverse trade-diversion effect that would counteract the positive trade-creation effect. T F 26. The potential for trade diversion is smaller when a custom union’s external tariff is lower rather than higher. T F 27. If a customs union included all of the countries in the world, there could exist only trade creation, not trade diversion. T F 28. The larger the size and the greater the number of countries in a customs union, the greater will be the trade-diversion effect. T F 29. Over the long run, the formation of a customs union may yield welfare gains due to economies of scale, greater competition, and stimulus to investment. T F 30. By the mid-1990s, the European Union had essentially achieved the common market stage of economic integration. T F 31. At the Maastricht Summit of 1991, members of the European Union expressed the goal of achieving the common market stage of economic integration. T F 32. To protect its farmers from foreign competition, the European Union has utilized variable import levies and export subsidies. T F 33. To protect its farmers from imports of agricultural goods, the European Union has implemented tariff rates that vary directly with world prices. T F 34. As of 1992, the European Union had achieved the monetary union stage of economic integration. T F 35. The Maastricht Treaty of 1991 established a blueprint for economic union and monetary union for European Union members. 15
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Chapter 9: Regional Trading Arrangements T F 36. It is generally agreed that completing the common market stage of integration for the European Union contributed to overall welfare losses due to trade diversion exceeding trade creation. T F 37. Government procurement liberalization permits a country to realize cost savings resulting from the trade effect, competition effect, and economies-of-scale effect. T F 38. During the 1980s and 1990s, the United States negotiated free-trade agreements with Israel, Mexico, and Canada.
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