Chapter 7 ib

Chapter 7 – Regional Economic Integration and Cooperative Agreements

Multiple Choice Questions

1.      _______________ is an important reason for economic integration.

a.       Geographic proximity

b.       Democracy

c.       Totalitarianism

d.       Common law practice

3.      Geographic proximity is an important reason for economic integration because consumer tastes are likely to be:

a.       different.

b.       opposite.

c.       similar.

d.       strange.

WHAT ARE THE TYPES OF ECONOMIC INTEGRATION AND THE DIFFERENCES AMONG THESE TYPES?

4.      Which of the following types of regional economic integration focuses only on eliminating internal tariffs?

a.       customs union

b.       common market

c.       complete economic integration

d.      free trade area

5.      In which of the following types of regional economic integration are internal tariffs eliminated with member countries levying a common external tariff on goods being imported from nonmembers.

a.       customs union

b.       free trade area

c.       common market

d.       complete economic integration

6.      A _______________ focuses on eliminating internal tariffs with member countries levying a common external tariff on goods being imported from nonmembers. Additionally, this type of regional economic integration allows free mobility of production factors such as labor and capital.

a.       free trade area

b.      common market

c.       customs union

d.       complete economic integration

7.      In _______________, countries focus on eliminating internal tariffs among member countries, have a common external trading policy among nonmembers, allow free mobility of productions factors within member countries, and adopt common economic policies.

a.       free trade area

b.       customs union

c.       complete economic integration

d.       common market

EXPLAIN THE STATIC EFFECTS AND DYNAMIC EFFECTS OF ECONOMIC INTEGRATION

8.      _______________ of integration are the shifting of resources from inefficient to efficient companies as trade barriers fall.

a.       Dynamic effects

b.       Regional effects

c.       Global effects

d.      Static effects

9.      The overall growth in the market and the impact on a company of expanding production and achieving greater economies of scale is called _______________ of integration.

a.       dynamic effects

b.       static effects

c.       regional effects

d.       global effects

10.    When trade barriers come down and the size of the market increases, this is known as _______________ of integration.

a.       static effects

b.      dynamic effects

c.       regional effects

d.       global effects

WHAT IS THE DIFFERENCE BETWEEN TRADE CREATION AND TRADE DIVERSION RESULTING FROM ECONOMIC INTEGRATION?

11.    _______________ occurs when production shifts to more efficient producers for reasons of comparative advantage, allowing consumers access to more goods at a lower price than would have been possible without integration.

a.       Trade diversion

b.       Divestment

c.       Trade creation

d.       Retrenchment

12.    _______________ occurs when trade shifts to countries in the group at the expense of trade with countries not in the group, even though the nonmember country might be more efficient in the absence of trade barriers.

a.       Trade creation

b.       Divestment

c.       Retrenchment

d.      Trade diversion

13.    Dynamic effects of integration occur when trade barriers _____________ and the size of the market __________.

a.       fall; increases

b.       rise; increases

c.       rise, decreases

d.       fall; decreases

15.    _______________ is comprised of the heads of state and government of each member country.

a.       The Council of Ministers

b.       The World Trade Organization

c.       The European Council

d.       The United Nations

16.    The major responsibilities of the European Parliament include all of the following EXCEPT:

a.       legislative power

b.       control over budget

c.       supervision of executive decisions

d.      control over religious beliefs

17.    The _______________ is an appeals court for individuals, firms, and organizations fined by the Commission for infringing Treaty Law.

a.       European Court of Justice

b.       World Trade Organization

c.       United Nations

d.       European Council

20.    The Euro is being administered by the _______________, which was established on July 1, 1998.

a.       World Trade Organization

b.       United Nations

c.       European Central Bank

d.       Ministry of Finance

21.    The _______________ is responsible for setting monetary policy and managing the exchange rate system for all of Europe since January 1, 1999.

a.       World Trade Organization

b.       United Nations

c.       Ministry of Finance

d.      European Central Bank

WHAT WAS THE RATIONALE FOR NAFTA?

24.    Which of the following was developed with the rationale that the U.S.-Canadian trade was the largest bilateral trade in the world and that the United States is Mexico’s and Canada’s largest trading partner?

a.       CEFTA (the Central European Free Trade Agreement)

b.      NAFTA (the North American Free Trade Agreement)

c.       ASEAN (Association of South East Asian Nations)

d.       EU (the European Union)

25.    NAFTA calls for all of the following EXCEPT:

a.       the harmonization of trade rules

b.       the liberalization of restrictions on services

c.       the implementation of a common currency

d.       the liberalization of restrictions on foreign investment

49.    The major source of influence for global environmental agreements is the:

a.       World Bank.

b.      United Nations.

c.       European Union.

d.       NAFTA.

Essay Questions

51.    Explain the static effects and dynamic effects of economic integration.  What is the difference between trade creation and trade diversion resulting from economic integration?

         Answer

Static effects are the shifting of resources from inefficient to efficient companies as trade barriers fall. Dynamic effects are the overall growth in the market and the impact on a company of expanding production and achieving greater economies of scale. Static effects may develop when either of two conditions occurs:

a.       trade creation – production shifts to more efficient producers for reasons of comparative advantage, allowing consumers access to more goods at a lower price than would have been possible without integration.

b.       trade diversion – trade shifts to countries in the group at the expense of trade with countries not in the group, even though the nonmember company might be more efficient in the absence of trade barriers.

Dynamic effects of integration occur when trade barriers come down and the size of the market increases.

53.    What was the rationale for NAFTA?

         Answer

NAFTA, which include Canada, the United States, and Mexico, went into effect in 1994, but it originated with the Canada-U.S. Free Trade Agreement. The United States and Canada historically have had various forms of mutual economic cooperation. In February 1991, Mexico approached the United States to establish a free-trade agreement. The formal negotiations that began in June 1991 included Canada. The resulting North American Free Trade Agreement became effective on January 1, 1994. NAFTA has a logical rationale, in terms of both geographic location and trading importance. Although Canadian-Mexican trade was not significant when the agreement was signed, U.S.-Mexican and U.S.-Canadian trade was. The two-way trading relationship between the United States and Canada is the largest in the world. NAFTA provides the static and dynamic effects of economic integration. For example, Canadian and U.S. consumers benefit from lower-cost agricultural products from Mexico, a static effect of economic liberalization. U.S. producers also benefit from the large and growing Mexican market, which has a huge appetite for U.S. products—a dynamic effect.

        

55.    What has been the impact of NAFTA on trade and employment?

Answer

         Since NAFTA has been in place, the U.S., Canada, and Mexico have tripled their business dealings with trade among the countries equaling $1.7 billion per day. U.S. exports to Mexico have increased, but Mexican exports to the U.S. have surged even more.  The investment and employment picture are far more complicated. One concern for U.S. workers was that investment would move to Mexico due to lower wages and lax environmental standards in Mexico. 

57.    What is the purpose of commodity agreements?

         Answer

Commodity agreements are of two basic types: producers’ alliances and international commodity control agreements (ICCAs). Producers’ alliances are exclusive membership agreements between producing and exporting countries. Examples are Organization of Petroleum Exporting Countries (OPEC) and the Union of Banana Exporting Countries. ICCAs are agreements between producing and consuming countries. Examples of ICCAs are the International Cocoa Organization (ICCO) and the International Sugar Organization. Most developing countries traditionally have relied on the export of one or two commodities to supply the foreign currencies from industrial countries they need for economic development. However, commodity prices are not stable. One approach to counteract price instability was the buffer-stock system. A buffer-stock system is a partially managed commodity agreement that a central agency monitors. Another approach is a quota system, where producing countries divide total output and sales to stabilize the price. For the quota system to work, participating countries must cooperate among themselves to prevent sharp fluctuations in supply. The quota system is most effective when a single country has a large share of world production or consumption because they are able to control supply much more easily.