Page 246 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

International Trade and Finance

Notes Self-Assessment
1. Choose the correct options:
(i) Which one of the following sets of countries contains only members of the European Union
(EU)?
(a) France, Spain, Switzerland, UK
(b) Germany, Italy, Portugal, Sweden
(c) Denmark, Greece, the Netherlands, Poland
(d) Belgium, Greece, Italy, Portugal
(ii) If good X of country C faces a 10% tariff in country A and a 20% tariff in country B, but if A
and B have free trade between each other, then A and B are part of which one (and only one)
of the following types of groupings?
(a) Free trade area (b) Customs union
(c) Common market (d) Economic union
(iii) If country A forms a customs union with country B, then
(a) country B continues to get tariff revenue from country A's exports sent to B.
(b) all new trade between A and B because of the union is known as "trade creation".
(c) the welfare of A and B must necessarily be enhanced, especially if A and B begin to buy
many items from each other that they used to buy from the :"outside world".
(d) A and B may especially benefit from the union if substantial economies of scale exist in
some of the A and B industries.
4. If two countries remove all tariffs on each other's products and establish a common set of
tariffs against the rest of the world, but take no further steps toward economic integration,
these two countries have formed _____.
(a) a free trade area (b) a customs union
(c) a common market (d) an economic union
(v) Which of the following is considered to be a positive dynamic effect of integration?
(a) economic-of-scale effects
(b) reduced customs costs
(c) trade division
(d) the increased monopoly power of firms
21.4 Summary

• A tariff will induce inefficiency losses, but preferential trading areas with partners with upsloping
supply curves greatly magnify the losses. This explains why preferential trade arrangements
with small partner countries or with countries that may be expected to increase supply at higher
protected prices can be expected to be very inefficient, more inefficient than non-preferential
tariff protection at the same rate.
21.5 Key-Words

1. Trade Creation : When trade b/w custom union partners increases, this implies a shift in the
Union to more efficient, competitive producers
2. Trade Diversion : When imports from the less expensive world market are replaced by imports
from a higher cost/less efficient partner country within the customs union

* The government obtains tariff revenue on the imports from the rest of the world, equal to the
rectangle GHAD, but imports from partner countries enter without paying tariffs.

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