Question

True or False? Explain.

1.     T / F         Trade discrimination is bad in the sense that separate deals with separate nations may destroy many of the gains from global markets.

2.     T / F         The formation of a customs union will definitely raise welfare.

3.     T / F         The less elastic the import demand curve, the greater the gains from a customs union.

4.     T / F         Customs unions are more likely to be successful among developed countries than among less-developed countries.

5.     T / F         An export embargo will backfire if the embargoing country has an inelastic export supply curve while the target country has an elastic import demand curve.

Multiple Choice

1.         If all member nations of a customs union are fully employed before and after the formation of the union, then (assuming that trade diversion does not dominate)

A. the welfare of the member nations will decrease.

B. the welfare of the member nations will increase but world welfare will decrease.

C. the welfare of the member nations and the world will increase.

D. no member nations will have time to organize good soccer matches.

2.         Trade sanctions are

A. usually successful as long as the imposing countries are developed countries.

B. more likely to be successful when the sanctioning countries have high trade elasticities.

C. more likely to be successful when the sanctioning countries have low trade elasticities.

D. successful mostly due to world cooperation, not trade elasticities.

3.         Which of the following is not correct?

A. The formation of a common market allows the free movement of factors of production between member nations.

B. The 1992 EC common market overturned Italian Pasta Protection Laws, which protected higher­-cost producers.

C. A common market coordinates monetary and fiscal policies of members.

D. Common markets have been more successful among rich countries than among poor countries.

4.         The United States was able to initiate most of the trade embargoes in the last four decades mainly because

A. the U.S. is a superpower.

B. the U.S. has high demand and supply elasticities in a significant number of products and can, therefore, influence trade.

C. other countries cannot do without U.S. trade.

D. embargoes are usually successful.

5.         If, after the creation of the EU, the British have an incentive to purchase less efficiently produced Irish cheese rather than importing inexpensive cheese from New Zealand, this probably shows

A. trade creation.

B. trade diversion.

C. government interference in the marketplace.

D. common sense.

Answer 1

1) Solution: True
Explanation: The discrimination in trade will not be good in an approach that separate deals with separate countries can destroy most of the gains from international markets.

2) Solution: False
Explanation: The formation of a customs union will not surely increase the welfare.

3) Solution: False
Explanation: With less elastic the import demand curve, there will be less benefits from a customs union.

4) Solution: True
Explanation: Customs unions tend to be highly successful among developed nations compared to the less-developed nations.

5) Solution: True
Explanation: An export embargo will backfire when the nation which is embargoing has an inelastic export supply curve and on contrast the target nation’s experiences an elastic import demand curve.

1) Solution: Option-C
Explanation: The member nations and the world welfare will increase if the customs union are fully employed before as well as after the union formation.
2) Solution: Option-B
Explanation: Trade sanctions tends to be highly successful if sanctioning nations faces the high trade elasticities
3) Solution: Option-C
Explanation: The common market will be coordinating the fiscal as well as the monetary policies of members.
4) Solution: Option-B .
Explanation: United States experiences high supply and demand elasticities in high number of goods and thus can influence trade.
5) Solution: Option-B
Explanation: The trade diversion occurs when trade is diverted towards a less efficient from the a more efficient exporter with free trade agreement