Ch6 International Trade Theory Exam Prep

Student name:__________

1) Discuss the trend toward increased regional economic integration.

2) Compare and contrast a free trade area and a common market. Provide examples.

3) What is the political case for integration? How did political arguments influence the establishment of the European Union?

4) What are impediments to countries integrating?

5) What prompted the formation of the European Union?

6) What is the Single European Act? What was the effect of the Single European Act on the EU economy? Did the Single European Act achieve its goals?

7) How will EU countries benefit from the establishment of a single currency? What, if any, are the costs of a single currency?

8) Explain the North American Free Trade Agreement and then debate its ratification.

9) Explain how Mercosur has changed over time. What are the implications of these changes?

10) What is ASEAN? What is its basic goal? How successful is ASEAN?

11) Describe the state of economic integration in Africa. What factors have hindered the process?

12) Discuss the opportunities arising from the creation of the EU for international businesses.

13) Describe the disadvantages of economic integration for international businesses. How can firms protect themselves from these threats?

14) From least integrated to most integrated, the levels of economic integration are a

A) common market, a free trade area, an economic union, a customs union, and a political union.
B) free trade area, a customs union, a common market, an economic union, and a political union.
C) customs union, a free trade area, a common market, a political union, and an economic union.
D) common market, an economic union, a customs union, a free trade area, and a political union.

15) Which level of economic integration eliminates trade barriers between member countries and adopts a common external trade policy?

A) political union
B) customs union
C) common market
D) economic union

16) Which feature of a common market differentiates it from a customs union?

A) requires harmonization of members’ tax rates
B) has a common currency
C) holds a common external trade policy toward nonmembers
D) allows factors of production to move freely among members

17) ________ involves the free flow of products and factors of production between member countries, the adoption of a common external trade policy, a common currency, harmonization of members’ tax rates, and a common monetary and fiscal policy.

A) An economic union
B) A common market
C) A customs union
D) A free trade area

18) Which is the most enduring free trade area in the world?

A) Central America Free Trade Association (CAFTA)
B) European Free Trade Association (EFTA)
C) Association of Southeast Asian Nations (ASEAN)
D) North American Free Trade Association (NAFTA)

19) Which feature of an economic union differentiates it from a common market?

A) free flow of products and factors of production between member countries
B) a common monetary and fiscal policy
C) a common external trade policy toward nonmembers
D) ability of factors of production to move freely between members

20) Which of the following is a reason the European Union is considered an imperfect economic union?

A) Factors of production are not allowed to move freely between member countries.
B) Not all members of the union have adopted the euro.
C) Almost all markets are heavily regulated.
D) Products and services are not allowed to move freely between member countries.

21) The move toward economic union raises the issue of how to make a coordinating bureaucracy accountable to the citizens of member nations. Which of the following offers a solution to this problem?

A) a common market
B) a free trade area
C) a customs union
D) a political union

22) ________ has no barriers to trade between member countries, includes a common external trade policy, and allows factors of production to move freely between members.

A) An economic union
B) A common market
C) A customs union
D) A full political union

23) ________ entails even closer economic integration and cooperation than a common market.

A) A customs union
B) A free trade area
C) An economic union
D) A political union

24) Country X and Country Y reach an agreement to boost bilateral trade. They agree to remove all barriers to the trade of goods and services. They, however, are free to determine their own trade policies with regard to nonmembers. Which level of economic integration is this an example of?

A) a customs union
B) an economic union
C) a common market
D) a free trade area

25) Which feature of a customs union differentiates it from a free trade area?

A) harmonization of members’ tax rates
B) a common currency
C) a common external trade policy toward nonmembers
D) ability of factors of production to move freely between members

26) Three countries agree to remove barriers to trade between member countries and adopt a common external trade policy toward nonmembers. They also agree to allow people and other factors of production to move freely across their borders. Which level of economic integration is this an example of?

A) bonded market
B) customs union
C) free trade area
D) common market

27) _____ eliminates trade barriers between member nations, adopts a common external policy, and permits factors of production to move freely between member countries but it also requires a common currency, harmonization of members’ tax rates, and a common monetary and fiscal policy.

A) A free trade area
B) A common market
C) An economic union
D) A customs union

28) Linking neighboring countries economically and making them interdependent

A) increases the potential for violent conflict.
B) creates increased political tensions.
C) leads to dilution of cultures.
D) creates incentives to increase political cooperation as well.

29) Why doesn’t Great Britain use the euro as its national currency?

A) It would have to convert its economic structure to the euro.
B) It would have to relinquish control of its monetary policy to the EU.
C) It would have to change its financial markets operations.
D) It would have to obtain approval from the U.S. Federal Reserve.

30) A political benefit of economic integration is that it

A) enables participants to achieve gains from the free flow of trade.
B) enables participants to achieve gains from the free flow of investment.
C) allows countries to specialize in the production of goods and services that they can produce most efficiently.
D) reduces the potential for violent conflict and war.

31) Which of the following explains why economic integration has never been easy to achieve or sustain, despite the strong economic and political arguments in support?

A) No country has shown significant improvement because of economic integration.
B) Countries fear a reduction of their political weight in the world because of economic integration.
C) Linking neighboring economies and making them increasingly dependent on each other creates little incentive for political cooperation.
D) While a nation as a whole may benefit significantly, certain groups may lose.

32) _____ occurs when high-cost domestic producers are replaced by low-cost producers within the free trade area.

A) Trade deficit
B) Trade diversion
C) Trade creation
D) Trade distortion

33) Which of the following occurs when lower-cost external suppliers are replaced by higher-cost suppliers within the free trade area?

A) efficiency gain
B) trade diversion
C) trade deficit
D) trade creation

34) Country A and Country B entered into a free trade agreement recently. After this, Country A starts importing heavy machinery from Country B. Country A previously imported such machinery at lower rates from another country. Which of the following has occurred in this scenario?

A) trade creation
B) efficiency gain
C) trade deficit
D) trade diversion

35) To ensure that a free trade agreement does not result in trade diversion, which of the following has to come within the scope of the WTO?

A) nontariff barriers
B) services
C) energy markets
D) tax rates

36) _____ may also occur when higher-cost external producers are replaced by lower-cost external producers within the free trade area.

A) Trade creation
B) A customs union
C) Trade diversion
D) A common market

37) Which of the following is a concern of some economists regarding regional integration?

A) The benefits of regional integration are determined by the extent of trade diversion.
B) The benefits of regional integration may have been oversold, while the costs have been ignored.
C) A regional free trade agreement will benefit the world only if the amount of trade it diverts exceeds the amount it creates.
D) The costs of regional integration will be exceedingly high with little chance that the benefits will outweigh the costs.

38) In theory, WTO rules should ensure that a free trade agreement

A) does not result in trade creation.
B) does not result in trade diversion.
C) results in trade creation.
D) results in trade diversion.

39) The European Community was established by the

A) Treaty of Rome signed in 1957.
B) Maastricht Treaty signed in 1992.
C) Maastricht Treaty of 1994.
D) Single European Act of 1987.

40) The _____ is responsible for proposing EU legislation, implementing it, and monitoring compliance with EU laws by member states.

A) European Parliament
B) European Commission
C) Council of the European Union
D) Court of Justice

41) Why is the European Council said to be the ultimate controlling authority within the EU?

A) It is responsible for implementing EU legislation and monitoring compliance with EU laws by member states.
B) Its role in setting competition policy is becoming increasingly important to business.
C) It has the right to vote on the appointment of commissioners.
D) Draft legislation from the commission can become EU law only if the council agrees.

42) Which of the following is directly elected by the populations of the member states and is primarily a consultative rather than legislative body?

A) the European Parliament
B) the European Commission
C) the Council of the European Union
D) the Court of Justice

43) Which of the following was the outcome of the Treaty of Lisbon signed in 2007?

A) It established the European Community.
B) It resulted in the adoption of the euro.
C) It changed the name of the European Community to the European Union.
D) It increased the power of the European Parliament.

44) Which of the following observations pertaining to the EU’s Court of Justice is correct?

A) It is composed of two judges from each country.
B) It is the supreme appeals court for EU law.
C) Its judges are required to act as representatives of national interests.
D) A member country can bring other members to the court for failing to meet EU treaty obligations only with the support of two other uninvolved EU countries.

45) Which of the following observations is true of the euro?

A) It is used by all member states of the European Union.
B) While recommended, it is not required that participating countries give up their own currencies.
C) It required participating countries to give up control over monetary policy.
D) By adopting it, the EU created the most widely traded currency in the world.

46) Which treaty, signed in February 1992, committed EC members to adopting a common currency by January 1, 1999?

A) the Maastricht Treaty
B) the Treaty of Rome
C) the Single European Act
D) the Treaty of Lisbon

47) Which of the following is seen as a benefit of the euro?

A) governments gaining greater control over their monetary policies
B) reduced competition in most industries
C) zero interest expense for businesses
D) lower foreign exchange and hedging costs as well as currency volatility risk

48) Which of the following is seen as a disadvantage of the euro?

A) higher foreign exchange and hedging costs
B) national authorities losing control over monetary policy
C) difficulty comparing prices across Europe
D) undermining the development of a pan-European capital market

49) In ____, similarities in the underlying structure of economic activity make it feasible to adopt a single currency and use a single exchange rate as an instrument of macroeconomic policy.

A) an optimal currency area
B) a unified economic area
C) a uniform currency zone
D) a monetary zone

50) Which of the following was required for new applicants to qualify for EU membership?

A) minimum economy size of €1 trillion
B) nationalization of private assets
C) deregulation of markets
D) sustained GDP growth of 10 percent for five years

51) Which of the following is seen to be a consequence of the expansion of the EU from 15 nations to 28 nations?

A) delays in decision-making processes
B) elimination of the sovereign debt crisis
C) euro becoming the most traded currency in the world
D) huge initial impact on the overall economic welfare

52) Which of the following is a reason Turkey is not yet a member of the EU?

A) Only about 10 percent of Turkey’s international trade is with the EU.
B) There are concerns over human rights issues in the country.
C) The country has yet to form a customs union with the EU.
D) Turkey has a weak economy.

53) How does the NAFTA seem to increase the international competitiveness of U.S. and Canadian firms?

A) It gives them access to scarce natural resources hitherto unavailable.
B) It increases tariff barriers making the North American market less attractive to Asian companies.
C) It allows them to take advantage of lower labor costs in Mexico.
D) It gives them production bases in South American markets such as Brazil and Argentina.

54) What was the main objection raised by those in the United States and Canada who opposed the ratification of the NAFTA?

A) job losses
B) balance-of-payment problems
C) threat of competition from Asian companies
D) threat of a loss of national sovereignty

55) In 1990, Bolivia, Peru, Ecuador, Colombia, and Venezuela relaunched

A) Mercosur.
B) NAFTA.
C) APEC.
D) the Andean Pact.

56) Mercosur originated as _____ between Brazil and Argentina in 1988.

A) a common market
B) a free trade pact
C) a customs union
D) an economic union

57) According to Alexander Yeats

A) the trade diversion effects of Mercosur outweigh its trade creation effects.
B) the fastest growing items in intra-Mercosur trade were capital-intensive goods produced efficiently in the member countries.
C) Mercosur countries will be able to compete globally once the group’s external trade barriers come down.
D) the customs union is becoming more perfect over time.

58) In early 2006, six CARICOM members and the United States established the _____, which was modeled on the EU’s single market.

A) Central American Common Market
B) Central America Free Trade Agreement
C) Caribbean Single Market and Economy
D) North American Free Trade Area

59) Which of the following is true of ASEAN?

A) China, India, South Korea, and Singapore are among its members.
B) Collectively, the member states account for about 55 percent of world trade.
C) It is slowly progressing toward establishing a free trade zone.
D) It has been successful in fulfilling its basic objective of fostering freer trade between member countries.

60) Which of the following is the most frequently aired objection to free trade in Africa?

A) These economies are too small for free trade to exist.
B) These countries are not ready for a full-fledged political union with a common currency.
C) The countries need to be “protected” by tariff barriers from unfair foreign competition.
D) The larger nations such as South Africa and Kenya stand to lose too much from free trade and competition.

61) The _____ represents the interests of member states and is clearly the ultimate controlling authority within the EU.

A) European Council
B) European Parliament
C) Court of Justice
D) European Commission

62) Which of the following, adopted by the member nations of the European Community in 1987, committed member countries to work toward the establishment of a single market by December 31, 1992?

A) Treaty of Rome
B) Single European Act
C) Treaty of Lisbon
D) Maastricht Treaty

63) How has the euro contributed to increasing competition in the European region?

A) by increasing hedging costs
B) by increasing the cost of capital
C) by making price comparisons easy
D) by enabling a common monetary policy

64) There are two main trading blocs in Europe, the European Union and the

A) Mercosur.
B) Andean Community.
C) European Free Trade Association.
D) European Council.

65) The ultimate controlling unit within the EU is the

A) European Commission.
B) European Parliament.
C) Court of Justice.
D) Council of the European Union.

66) The _____ is primarily a consultative rather than legislative body.

A) European Parliament
B) Court of Justice
C) Council of the European Union
D) European Commission

67) The establishment of the euro required participating countries to

A) first convert their currency to U.S. dollars, then to euros.
B) give up national control over monetary policy.
C) create national banks at which citizens can convert their existing currency.
D) maintain their own currency in parallel to the euro.

68) Three long-term EU members, Great Britain, _____, and Sweden, have not adopted the euro.

A) France
B) Italy
C) Denmark
D) Greece

69) On average, studies indicate that NAFTA’s overall impact has been

A) large but negative.
B) large and positive.
C) small and negative.
D) small but positive.

70) According to _____, the trade diversion effects of Mercosur outweigh its trade creation effects.

A) Alexander Yeats
B) the majority of economists
C) Jacques Delors
D) the World Trade Organization

71) The most recent attempt to reenergize the free trade movement in Africa occurred in early 2001, when _____, Uganda, and Tanzania, member states of the East African Community (EAC), committed themselves to relaunching their bloc, 24 years after it collapsed.

A) Sudan
B) Ethiopia
C) Kenya
D) Somalia

72) The United States, Canada, and Mexico are member nations of

A) CAFTA.
B) Mercosur.
C) the Andean Pact.
D) NAFTA.

73) Four main institutions make up the political structure of the EU. Which of them is responsible for proposing EU legislation, implementing it, and monitoring compliance with EU laws?

A) European Council
B) Court of Justice
C) European Commission
D) European Parliament

74) Which of the following established the second largest currency zone in the world?

A) Treaty of Rome
B) Maastricht Treaty
C) Treaty of Lisbon
D) Single European Act

75) The lowering of barriers to trade and investment among countries has led to _____ throughout the EU.

A) higher costs of borrowing
B) increase prices
C) increase in hedging costs
D) increased price competition

76) Once barriers to trade and investment are removed, companies

A) can realize cost economies by centralizing production in key locations regardless of culture differences.
B) can treat a group of integrated countries like the EU as a single market and produce standardized products for it.
C) no longer have to deal with competitive practices that formerly limited their ability to realize cost economies.
D) may still find it difficult to produce a standardized product for a single multiple-country market due to cultural, economic, administrative and geographic distances.

77) The emerging role of the _____ in competition policy suggests the EU is increasingly willing and able to intervene and impose conditions on companies proposing mergers and acquisitions.

A) European Commission
B) Court of Justice
C) European Council
D) European Parliament

78) Firms outside of trading areas run the risk of being shut out of the single market by the creation of a

A) “trade fortress.”
B) contracting economy.
C) single-market zone.
D) destabilized economy.

79) Charlyce lives in a country where there are no barriers to the trade of goods and services. This is called a free trade area/zone.

⊚ true
⊚ false

80) In a customs union, trade barriers are eliminated among member countries, and each country maintains its own external trade policies.

⊚ true
⊚ false

81) The European Union is an example of an economic union.

⊚ true
⊚ false

82) Coordination and policy harmonization problems increase as the number of countries that seek agreement increases.

⊚ true
⊚ false

83) Because of the fact that everyone benefits from economic integration, it is easy to achieve and sustain.

⊚ true
⊚ false

84) Concerns about national sovereignty in the EU have been a major impediment to economic integration.

⊚ true
⊚ false

85) A regional free trade agreement will benefit the world only when the amount of trade it creates exceeds the amount of trade it diverts.

⊚ true
⊚ false

86) The Treaty of Rome, signed in 1957, established the European Free Trade Association.

⊚ true
⊚ false

87) A central reason for the establishment of the EU was the devastation of Western Europe during two world wars and the desire for a lasting peace.

⊚ true
⊚ false

88) The Council of the European Union is responsible for proposing EU legislation, implementing it, and monitoring compliance with EU laws by member states.

⊚ true
⊚ false

89) The judges of the European Court of Justice are required to act as representatives of national interests, rather than as independent officials.

⊚ true
⊚ false

90) The Single European Act committed EU countries to adopting a common currency by January 1, 1999.

⊚ true
⊚ false

91) Establishment of the euro created the largest currency zone in the world, replacing the position the U.S. dollar had held for decades.

⊚ true
⊚ false

92) A key benefit resulting from the adoption of the euro is the ability to compare prices across member markets.

⊚ true
⊚ false

93) The implied loss of national sovereignty to the European Central Bank (ECB) underlies the decision by Great Britain, Denmark, and Sweden to stay out of the euro zone for now.

⊚ true
⊚ false

94) The Andean Pact is a highly successful common market modeled after the EU.

⊚ true
⊚ false

95) Political turmoil and tribalism in several African nations has persistently impeded any meaningful progress in economic integration.

⊚ true
⊚ false

96) A benefit to companies of economic integration is the opportunity to centralize their production and reduce costs.

⊚ true
⊚ false