CHAPTER 8REGIONAL TRADING ARRANGEMENTS

MULTIPLE CHOICE

1.The European Union is primarily intended to permit:a.Countries to adopt scientific tariffs on importsb.An agricultural commodity cartel within the groupc.The adoption of export tariffs for revenue purposesd.Free movement of resources and products among member nations

ANS:DPTS:1

2.Which of the following represents the stage where economic integration is most complete?a.Economic unionb.Customs unionc.Monetary uniond.Common market

ANS:CPTS:1

3.Which of the following represents the stage where economic integration is least complete?a.Free trade areab.Monetary unionc.Common marketd.Customs union

ANS:APTS:1

4.Customs union theory reasons that the formation of a customs union will decrease members' real welfare when the:a.Trade diversion effect exceeds the trade creation effectb.Trade production effect exceeds the trade consumption effectc.Trade consumption effect exceeds the trade production effectd.Trade creation effect exceeds the trade diversion effect

ANS:APTS:1

5.Which economic integration scheme is solely intended to abolish trade restrictions among member countries, while setting up common tariffs against nonmembers?a.Economic unionb.Common marketc.Free trade aread.Customs union

ANS:DPTS:1

6.By 1992 the European Union had become a full-fledged:a.Economic unionb.Monetary unionc.Common marketd.Fiscal union

ANS:CPTS:1

7.Which device has the European Union used to equalize farm-product import prices with politically determined European Union prices, regardless of shifts in world prices?a.Variable leviesb.Import quotasc.Import subsidiesd.Domestic content regulations

ANS:APTS:1

8.Which trade instrument has the European Union used to insulate its producers and consumers of agricultural goods from the impact of changing demand and supply conditions in the rest of the world?a.Domestic content regulationsb.Variable import leviesc.Voluntary export quotasd.Orderly marketing agreements

ANS:BPTS:1

9.Assume that the formation of a customs union turns out to include the lowest-cost world producer of the product in question. Which effect could not occur for the participating countries?a.Trade creation-production effectb.Trade creation-consumption effectc.Trade diversiond.Scale economies and competition

ANS:CPTS:1

10.Which organization of nations permits free trade among its members in industrial goods, while each member maintains freedom in its trade policies toward non-member countries?a.European Unionb.Beneluxc.Council for Mutual Economic Assistanced.North American Free Trade Association

ANS:DPTS:1

11.Which of the following organizations is considered a regional trading arrangement?a.Organization of Petroleum Exporting Countriesb.North Atlantic Treaty Organizationc.Beneluxd.International Tin Agreement

ANS:CPTS:1

12.When products from high-cost suppliers within a customs union replace imports from a low-cost nation that is not a member of the customs union, there exist(s):a.Dynamic welfare lossesb.Dynamic welfare gainsc.Trade creationd.Trade diversion

ANS:DPTS:1

13.Which form of economic integration occurs when participating countries abolish tariffs on trade among themselves, establish a common tariff on imports from nonmembers, and permit free movement of capital and labor within the organization?a.Free trade areab.Economic unionc.Common marketd.Monetary union

ANS:CPTS:1

14.A static welfare effect resulting from the formation of the European Union would be:a.Economies of scaleb.Trade diversionc.Investment incentivesd.Increased competition

ANS:BPTS:1

15.A dynamic welfare gain resulting from the formation of the European Union would be:a.Trade diversionb.Trade creationc.Diseconomies of scaled.Economies of scale

ANS:DPTS:1

16.Which organization was founded in 1957 whose objective was to create an economic union among its members?a.General Agreements on Tariffs and Tradeb.Organization of Economic Cooperation and Developmentc.European Uniond.Latin American Free Trade Association

ANS:CPTS:1

17.The common agriculture policy of the European Union has supported European farmers via:a.Export tariffs and domestic content regulationsb.Variable levies and voluntary export agreementsc.Content regulations and export subsidiesd.Export subsidies and variable levies

ANS:DPTS:1

18.Which nation is not a member of the North American Free Trade Association?a.Canadab.Greenlandc.Mexicod.United States

ANS:BPTS:1

19.Suppose a communist country agrees to pay for delivery of machinery with goods produced by the machinery. This arrangement refers to:a.Countertradeb.International commodity agreementsc.Coproduction agreementsd.Trade diversion

ANS:APTS:1

20.NAFTA is a:a.Monetary unionb.Free trade areac.Common marketd.Customs union

ANS:BPTS:1

21.Under the European Union's common agricultural policy, a variable import levy equals the:a.Amount by which the EU's support price exceeds the world priceb.Amount by which the world price exceeds the EU's support pricec.Support price of the EUd.World price

ANS:APTS:1

22.Members of the European Union find that "trade creation" is fostered when their economies are:a.Highly competitiveb.Highly noncompetitivec.Small in economic importanced.Geographically distant

ANS:APTS:1

23.The European Union has achieved all of the following except:a.Adopted a common fiscal policy for member nationsb.Established a common system of agricultural price supportsc.Disbanded all tariffs among its member countriesd.Levied common tariffs on products imported from nonmembers

ANS:APTS:1

24.When the United States, Canada, and Mexico form a free trade area, and Mexico begins importing a product from Canada rather than from the lowest cost world producer.a.Trade diversion occursb.Trade creation occursc.World welfare risesd.World welfare falls to zero

ANS:APTS:1

25.When the formation of a free trade area results in the reduction of trade with nonmember nations in favor of member countries, ____ occurs.a.Trade devaluationb.Trade revaluationc.Trade destructiond.Trade diversion

ANS:DPTS:1

26.Which country is not a member of the European Union?a.Spainb.Germanyc.Franced.Iceland

ANS:DPTS:1

27.The implementation of the European Union has:a.Made it harder for Americans to compete against the Germans in the British marketb.Made it easier for Americans to compete against the Germans in the British marketc.Made it harder for Americans to compete against the Japanese in the British marketd.Made it easier for Americans to compete against the Japanese in the British market

ANS:APTS:1

28.The common agricultural policy of the European Union has:a.Increased American farm exports to the EUb.Decreased American farm exports to the EUc.Lowered the price of American farm exports to the EUd.Not affected the price of American farm exports to the EU

ANS:BPTS:1

29.The implementation of a common market involves all of the following except:a.Elimination of trade restrictions among member countriesb.A common tax system and monetary unionc.Prohibition of restrictions on factor movementsd.A common tariff levied in imports from nonmembers

ANS:BPTS:1

30.Under the common agricultural policy, exports of any surplus quantities of EU produce are encouraged through the usage of:a.Variable leviesb.Export subsidiesc.Import quotasd.Countertrade

ANS:BPTS:1

Figure 8.1 depicts the supply and demand schedules of calculators for Greece, a "small" country that is unable to affect the world price. Greece's supply and demand schedules of calculators are respectively depicted by SG and DG. Assume that Greece imports calculators from either Germany or France. Suppose Germany is the world's low-cost producer who can supply calculators to Greece at $20 per unit, while France can supply calculators at $30 per unit.

Figure 8.1. Effects of a Customs Union

31.Consider Figure 8.1. With free trade, Greece imports:a.3 calculators from Franceb.5 calculators from Francec.3 calculators from Germanyd.5 calculators from Germany

ANS:DPTS:1

32.Consider to Figure 8.1. Assume Greece levies a per-unit tariff of $20 on imports from both Germany and France.

Greece will import:a.1 calculator from Germanyb.1 calculator from Francec.3 calculators from Germanyd.3 calculators from France

ANS:APTS:1

33.Consider Figure 8.1. Assume Greece levies a per-unit tariff of $20 on imports from both Germany and France.

As a result of the $20 tariff, Greece's consumer surplus falls by:a.$90b.$100c.$110d.$120

ANS:DPTS:1

34.Consider Figure 8.1. Assume Greece levies a per-unit tariff of $20 on imports from both Germany and France.

The deadweight welfare loss to Greece, resulting from the $20 tariff, equals:a.$20b.$40c.$60d.$80

ANS:BPTS:1

35.Referring to Figure 8.1, suppose Greece forms a customs union with France. Greece will import:a.3 calculators at a per-unit price of $30b.3 calculators at a per-unit price of $40c.6 calculators at a per-unit price of $30d.6 calculators at a per-unit price of $40

ANS:APTS:1

36.Consider Figure 8.1. The value of the trade diversion effect, resulting from the Greece/France customs union, equals:a.$5b.$10c.$15d.$20

ANS:BPTS:1

37.Consider Figure 8.1. The value of the trade creation effect, resulting from the Greece/France customs union, equals:a.$5b.$10c.$15d.$20

ANS:BPTS:1

38.Consider Figure 8.1. Comparing the trade creation and trade diversion effects, the impact of the Greece/France customs union on the welfare of Greece is:a.A $5 increase in economic welfareb.A $10 increase in economic welfarec.A $5 decrease in economic welfared.No change in economic welfare

ANS:DPTS:1

39.Consider Figure 8.1. Suppose Greece had formed a customs union with Germany, rather than France. The value of the trade diversion effect would be:a.Zerob.$5c.$10d.$15

ANS:APTS:1

40.According to Figure 8.1, the formation of a Greece/Germany customs union would result in:a.$20 of trade diversionb.$40 of trade diversionc.$20 of trade creationd.$40 of trade creation

ANS:DPTS:1

41.In 1989 Canada and the United States agreed to implement a (an) ____ over a ten year period.a.Customs unionb.Common marketc.Free trade aread.Economic union

ANS:CPTS:1

42.In the United States, the proposed North American Free Trade Agreement was generally supported by:a.Labor unionsb.Electronics firmsc.Environmentalistsd.Citrus producers

ANS:BPTS:1

43.At the Maastricht Summit of 1991, European Union negotiators called for the pursuit of a:a.Free trade areab.Customs unionc.Common marketd.Monetary union

ANS:DPTS:1

44.By removing discriminatory government procurement laws within the European Union, member nations hoped to benefit from all of the following except:a.EU governments could purchase from the cheapest foreign suppliersb.Increased competition occurs as domestic firms compete with foreign firms previously shut out of the domestic marketc.Industries are restructured which permits surviving firms to achieve economies of scaled.Agricultural prices fall as more farmers are allowed to produce their commodities

ANS:DPTS:1

45.Suppose that government procurement liberalization results in the U.K. government importing automobiles from Germany, the low-cost EU manufacturer. Cost savings could result from all of the following except:a.Competition effectb.Scale-economy effectc.Protective effectd.Trade effect

ANS:CPTS:1

46.Suppose that steel from Japan faces a 20 percent tariff in France and a 25 percent tariff in Italy, while France and Italy maintain free trade between each other. France and Italy are therefore part of a (an):a.Free trade areab.Customs unionc.Common marketd.Economic union

ANS:APTS:1

47.Suppose that Mexico and Canada form a free-trade area and Canada begins importing steel from Mexico rather than from Germany. There occurs:a.Trade diversionb.Trade creationc.Trade destructiond.Trade exhaustion

ANS:APTS:1

48.Suppose that Mexico and Canada form a free-trade area. Mexicans then decrease auto manufacturing and increase imports of autos from Canada, while the Canadians decrease computer production and import more computers from Mexico. This is an example of:a.Trade diversionb.Trade creationc.Trade destructiond.Trade exhaustion

ANS:BPTS:1

49.If the United States and Canada abolish all tariffs on each other's goods and implement a common tariff on goods imported from other countries, there occurs a (an):a.Free-trade areab.Customs unionc.Common marketd.Economic union

ANS:BPTS:1

50.Suppose that the United Kingdom and Italy abolish all tariffs on each other's goods and all restrictions on movements of factors of production between them. They also implement a common protectionist policy toward other countries. This is an example of a (an):a.Free-trade areab.Customs unionc.Common marketd.Economic union

ANS:CPTS:1

51.The North American Free Trade Agreement was expected to benefit ____ the most.a.Canadab.Mexicoc.Greenlandd.United States

ANS:BPTS:1

52.The North American Free-Trade Agreement was most strongly opposed by U.S.:a.Electronics manufacturersb.Labor unionsc.Commercial banksd.Engineering companies

ANS:BPTS:1

53.In the United States, which group was most likely to be hurt by the North American Free Trade Agreement?a.Unskilled laborb.Skilled laborc.Owners of capital equipmentd.Owners of financial capital

ANS:APTS:1

54.By joining NAFTA, the United States, Canada, and Mexico would find their short-run welfare decreasing due to the:a.Economies of scale effectb.Business investment effectc.Trade creation effectd.Trade diversion effect

ANS:DPTS:1

55.When Mexico became a part of NAFTA, along with Canada and the United States, it:a.Eliminated tariffs against Canada and the United States but maintained them against nonmembersb.Eliminated tariffs against Canada, the United States, and all nonmember countriesc.Increased tariffs against Canada the United States, and all nonmember countriesd.Increased tariffs against Canada and the United States, but did not change them against nonmember countries

ANS:APTS:1

56.In a centrally-planned economy:a.Commercial decisions are made by independent buyers and sellers acting in their own interestb.Market-determined prices are used for allocating scarce resourcesc.Prices play a rationing role so that the availability of goods is made consistent with buyer preferences and incomed.Government controls prices and output of goods bought and sold, with minimal recognition given to considerations of efficiency

ANS:DPTS:1

57.The failure of the centrally-planned economies was exemplified by all of the following except:a.Interest rates that were below free-market levelsb.Consumer and producer goods of inferior qualityc.Declining rates of economic growthd.Shortages of essential goods and services

ANS:APTS:1

58.The transition of the former communist countries to market economies requires:a.Implementation of governmental price controlsb.Privatization of public propertyc.Transforming competitive industries into monopoliesd.The sale of private industries to the government

ANS:BPTS:1

59.The transition of the former communist countries to market economies would likely result in:a.The implementation of price ceilingsb.The implementation of price floorsc.Price inflationd.Price deflation

ANS:CPTS:1

60.In the former Soviet Union, major manufacturing firms were typically:a.Owned and operated by employee labor unionsb.Owned and operated by the governmentc.Privately owned, but operated by the governmentd.Publically owned, but operated by the private sector

ANS:BPTS:1

61.The transition of the former communist countries to market economies requires all of the following except:a.Removing domestic price controlsb.Opening economies to international competitionc.Establishing private property rightsd.Terminating the convertibility of their currencies

ANS:DPTS:1

62.The former communist countries included all of the following except:a.East Germanyb.Soviet Unionc.Austriad.Poland

ANS:CPTS:1

63.The regional trade block of the former communist countries, which lasted from 1949-1991, was known as the:a.Eastern European Economic Areab.Nordic Preferential Trade Agreementc.Council for Mutual Economic Assistanced.European Industrial Cooperation Union

ANS:CPTS:1

64.The economic reforms of the early 1990s that occurred in the former Soviet Union and Eastern Europe resulted in:a.The formation of the Council for Mutual Economic Assistanceb.Multinational firms refusing to operate in these nationsc.A movement from centrally-planned economies toward market economiesd.A movement from market economies toward centrally-planned economies

ANS:CPTS:1

65.The transition from government-controlled prices to market-determined prices in the former communist countries would be expected to result in:a.Price stabilityb.Price deflationc.Price inflationd.None of the above

ANS:CPTS:1

66.Suppose that Canada has domestic firms that could supply its entire market for radios at a price of $50, while U.S. firms could supply radios at $40 and Mexico at $30. Suppose that Canada initially has a 50 percent tariff on imports of radios and then forms a free trade area with the United States. As a result, Canada realizes:a.Trade creation, no trade diversion, and overall welfare gainsb.Trade creation, no trade diversion, and overall welfare lossesc.Trade diversion, no trade creation, and potential overall welfare lossesd.Trade diversion, trade creation, and potential overall welfare gains

ANS:DPTS:1

67.Suppose that Canada has domestic firms that could supply its entire market for radios at a price of $50, while U.S. firms could supply radios at $40 and Mexico at $30. Suppose that Canada initially has a 50 percent tariff on imports of radios and then forms a free trade area with Mexico. As a result, Canada realizes:a.Trade creation, no trade diversion, and overall welfare gainsb.Trade creation, no trade diversion, and overall welfare lossesc.Trade diversion, no trade creation, and potential overall welfare lossesd.Trade diversion, trade creation, and potential overall welfare gains

ANS:APTS:1

68.As of 2002, members of the European Monetary Union agreed to replace their currencies with the:a.markb.dollarc.francd.euro

ANS:DPTS:1

69.The formation of the European Monetary Union is expected to entail benefits for member countries which include all of the following except:a.Greater certainty for investors within the EMUb.Lower costs of transactions within the EMUc.Independent monetary policies run by the central bank of each member countryd.Enhanced competition among companies in member countries

ANS:CPTS:1

70.According to the theory of optimum currency areas, a currency area has the least chance for success when:a.Countries of the currency area have differing business cyclesb.Workers have a high degree of mobility across borders of the currency areac.Prices and wages can be adjusted in response to economic disturbancesd.A single monetary policy affects all member countries in the same manner

ANS:APTS:1

71.A main disadvantage of the European Monetary Union is that:a.Each member country loses the use of monetary policy as to tool to combat recessionb.There is a high degree of labor mobility among the member countriesc.Prices are highly flexible in response to changing economic conditionsd.Wages are highly flexible in response to changing economic conditions

ANS:APTS:1

72.World welfare under a customs uniona.Increases due to a trade creation effectb.Decreases due to a trade diversion effectc.Depends on the relative strength of the trade creation effect and the trade diversion effectd.All of the above

ANS:DPTS:1

73.A common marketa.Allows the imposition of common external trade barriers against non-membersb.Represents less economic integration than a free trade areac.Does not permit free movement of goods among member nationsd.Does not allow free movement of factors of production among nations

ANS:APTS:1

74.The gains from having an optimum currency includea.Price differentiationb.Lower competitionc.Lower transaction costsd.Both b and c

ANS:CPTS:1

75.For decades, the Eastern European countries have suffered froma.Widespread price controlsb.Excessive competitionc.Lack of enforceable property rightsd.Both a and c

ANS:DPTS:1

TRUE/FALSE

The figure below depicts the steel market for Portugal, a small nation that is unable to affect the world price. Assume that Germany and France can supply steel to Portugal at a price of $200 and $300 respectively.

Figure 8.2. Portugal's Steel Market

1.Consider Figure 8.2. With free trade, Portugal will import 25 tons of steel from Germany at a price of $200 per ton.

ANS:TPTS:1

2.Consider Figure 8.2. With free trade, Portugal produces 15 tons of steel, consumes 30 tons of steel, and imports 15 tons of steel.

ANS:FPTS:1

3.Consider Figure 8.2. If Portugal levies a 100 percent nondiscriminatory tariff on its steel imports, it will purchase 5 tons of steel from France at a price of $500 per ton.

ANS:FPTS:1

4.Consider Figure 8.2. If Portugal forms a customs union with France, the resulting trade-creation effect equals $500.

ANS:TPTS:1

5.Consider Figure 8.2. If Portugal forms a customs union with France, the resulting trade-diversion effect equals $400.

ANS:FPTS:1

6.Consider Figure 8.2. As a result of a customs union formed with France, Portugal's overall welfare rises by $900.

ANS:FPTS:1

7.Consider Figure 8.2. If Portugal had formed a customs union with Germany, Portugal's welfare would have decreased by $500.

ANS:FPTS:1

8.The European Union protects its agricultural producers from import competition by the use of tariff rates that vary directly with world prices.

ANS:FPTS:1

9.Under the variable levy system of the European Union, EU farmers are protected against import competition by tariffs that vary inversely with the world price.

ANS:TPTS:1

10.Trade creation tends to more than offset trade diversion for a home country forming a customs union with partner countries when: (1) the tariff rate in the home country is high prior to the formation of the customs union; (2) there are a large number of countries forming the customs union.

ANS:TPTS:1

11.If Chile and Mexico form a free-trade agreement, the welfare of the two countries will necessarily increase.

ANS:FPTS:1

12.If Chile and Mexico abolish all tariffs on each other's products while maintaining their own tariffs against other countries, these two countries have formed a customs union.

ANS:FPTS:1

13.With a preferential trading arrangement, a group of countries agrees to unilaterally reduce tariffs applied to imports from all countries of the world.

ANS:FPTS:1

14.Economic integration is the process of eliminating restrictions on international trade, payments, and factor mobility.

ANS:TPTS:1

15.When a group of countries establish a free-trade area, they achieve the highest stage of economic integration.

ANS:FPTS:1

16.A free-trade area is an association of trading countries whose members agree to remove all trade restrictions among themselves, while each member country imposes identical trade restrictions against nonmember countries.

ANS:FPTS:1

17.If the United Kingdom and Italy eliminate all tariffs on each other's goods and all restrictions to factor movements between them, and implement a uniform system of import restrictions against the rest of the world, these countries have formed a common market.

ANS:TPTS:1

18.The highest stage of economic integration is a monetary union.

ANS:TPTS:1

19.Trade creation would occur if Canada and the United States form a free-trade area, and Canadians then import less steel from the United States while importing more steel from Japan.

ANS:FPTS:1

20.Suppose that Mexico and Canada form a free-trade area. The Mexicans then decrease refrigerator manufacturing and increase imports of refrigerators from Canada, while the Canadians decrease auto manufacturing and import more autos from Mexico. This is an example of trade creation.

ANS:TPTS:1

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.

ANS:TPTS:1

22.For countries forming a customs union, the trade-creation effect represents a welfare loss and the trade-diversion effect represents a welfare gain.

ANS:FPTS:1

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.

ANS:FPTS:1

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.

ANS:FPTS:1

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.

ANS:FPTS:1

26.The potential for trade diversion is smaller when a custom union's external tariff is lower rather than higher.

ANS:TPTS:1

27.If a customs union included all of the countries in the world, there could exist only trade creation, not trade diversion.

ANS:TPTS:1

28.The larger the size and the greater the number of countries in a customs union, the greater will be the trade-diversion effect.

ANS:FPTS:1

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.

ANS:TPTS:1

30.By the mid-1990s, the European Union had essentially achieved the common market stage of economic integration.

ANS:TPTS:1

31.At the Maastricht Summit of 1991, members of the European Union expressed the goal of achieving the common market stage of economic integration.

ANS:FPTS:1

32.To protect its farmers from foreign competition, the European Union has utilized variable import levies and export subsidies.

ANS:TPTS:1

33.To protect its farmers from imports of agricultural goods, the European Union has implemented tariff rates that vary directly with world prices.

ANS:FPTS:1

34.As of 1992, the European Union had achieved the monetary union stage of economic integration.

ANS:FPTS:1

35.The Maastricht Treaty of 1991 established a blueprint for economic union and monetary union for European Union members.

ANS:TPTS:1

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.

ANS:FPTS:1

37.Government procurement liberalization permits a country to realize cost savings resulting from the trade effect, competition effect, and economies-of-scale effect.

ANS:TPTS:1

38.During the 1980s and 1990s, the United States negotiated free-trade agreements with Israel, Mexico, and Canada.

ANS:TPTS:1

39.Forming a free-trade agreement with the United States provided Canadian producers a danger and an opportunity. The danger was that U.S. producers might be more price competitive than Canadian producers; the opportunity was that longer production runs for Canadian producers, made possible by a free-trade agreement, would result in cost reductions due to economies of scale.

ANS:TPTS:1

40.Some trade creation was expected to occur as a result of the U.S.-Canada free-trade agreement, since Canadian exports to the United States and U.S. exports to Canada were expected to expand at the expense of imports from Germany and Japan that faced trade restrictions.

ANS:TPTS:1

41.Negotiating the North American Free Trade Agreement was relatively easy since it involved meshing two large industrial countries with a developing country.

ANS:FPTS:1

42.Critics of the North American Free Trade Agreement maintained that it would result in manufacturing firms fleeing Mexico's stringent pollution-control policies and relocating in the United States and Canada.

ANS:FPTS:1

43.U.S. labor unions argued against the North American Free Trade Agreement on the grounds that it would result in U.S. companies relocating in Mexico in order to take advantage of lower wage rates.

ANS:TPTS:1

44.The North American Free Trade Agreement was expected to provide proportionately smaller benefits to Mexico than to the United States or Canada.

ANS:FPTS:1

45.In the former Soviet Union, production of capital goods was determined by the free market while consumer-goods production was determined by central planning.

ANS:FPTS:1

46.The former Soviet Union was characterized by central economic planning and public ownership of manufacturing enterprises.

ANS:TPTS:1

47.Pricing of consumer goods in the former Soviet Union was typically regulated by price ceilings which led to shortages.

ANS:TPTS:1

48.The transition of the former Soviet Union from a planned economy to a market economy would require the elimination of price controls, the privatization of public property, and the promotion of business competition.

ANS:TPTS:1

49.From the 1940s to the 1980s, the former communist countries remained isolated from the world economy, primarily due to different tariff systems among the former communist countries.

ANS:FPTS:1

50.A political dilemma facing the former communist countries in the 1990s was that the transition from a centrally-planned economy to a market economy would result in short-run costs but long-run benefits.

ANS:TPTS:1

SHORT ANSWER

1.What is meant by economic integration?

ANS:The term refers to the process of eliminating restrictions on international trade, payments, and factor input mobility.

PTS:1

2.What factors influence the extent of trade creation and trade diversion?

ANS:Trade creation and diversion are influenced by the degree of competitiveness that member-nation economies have prior to formation of the customs union, the number and size of its members, and the size of its external tariff against non-members.

PTS:1

ESSAY

1.Explain the theory of optimum currency areas.

ANS:Much of the analysis of the benefits and costs of Europe's common currency is based on the theory of an optimum currency area. According to this theory, the gains to be had from sharing a currency across countries' boundaries include more uniform prices; lower transaction costs, greater certainty for investors, and enhanced competition. These gains must be compared against the loss of an independent monetary policy and the option of changing the exchange rate.

PTS:1

2.Concerning transition economies, what do the advocates of shock therapy propose?

ANS:Advocates of shock therapy maintain that economies in transition should proceed immediately on all fronts. That is, they should privatize, abandon price controls, liberalize trade, and develop market institutions, and so on as quickly as possible. Although the initial economic pain may be severe, it will subside as the transition to the market economy leads to rising living standards.

PTS:1