Global Business Today 10th Edition Hill Test Bank

Global Business Today 10th Edition Hill
Test Bank
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Hill GBT 10e
Chapter 09 Test Bank
True / False Questions
1. As with free trade in general, regional economic integration creates gain for consumers, but it
can be challenging for some producers.
TRUE
By regional economic integration we mean agreements among countries in a geographic

region to reduce, and ultimately remove, tariff and nontariff barriers to the free flow of goods,
services, and factors of production between each other. Thus, as with free trade in general,
regional economic integration creates gain for consumers, but it can be challenging for some
producers. For example, the specter of the EU and NAFTA turning into economic fortresses that
shut out foreign producers through high tariff barriers is worrisome to those who believe in
unrestricted free trade.
AACSB: Analytical Thinking

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-01 Describe the different levels of regional economic integration.
Topic: Introduction
9-1
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
2. In a free trade area, all barriers to the trade of goods and services among member countries
are removed and a common external trade policy is adopted.
FALSE
In a free trade area, all barriers to the trade of goods and services among member countries
are removed. Each country, however, is allowed to determine its own trade policies with regard
to nonmembers.

Blooms: Remember
Difficulty: 1 Easy
Topic: Levels of Economic Integration
3. The emphasis of the European Free Trade Association has been on free trade in consumer
goods.
FALSE
The emphasis of the European Free Trade Association (EFTA) has been on free trade in
industrial goods. Agriculture was left out of the arrangement, each member being allowed to
determine its own level of support. Members are also free to determine the level of protection
applied to goods coming from outside the EFTA.

Blooms: Remember
Difficulty: 1 Easy
9-2
4. A common market has no barriers to trade among member countries, includes a common
external trade policy, and allows factors of production to move freely among members.
TRUE
A common market has no barriers to trade between member countries, includes a common
external trade policy, and allows factors of production to move freely between members. Labor
and capital are free to move because there are no restrictions on immigration, emigration, or
cross-border flows of capital between member countries.

Blooms: Remember
Difficulty: 1 Easy
5. A political union addresses the issue of how to make a coordinating bureaucracy accountable
to the citizens of member nations of an economic union.
TRUE
The move toward economic union raises the issue of how to make a coordinating bureaucracy
accountable to the citizens of member nations. The answer is through political union in which a
central political apparatus coordinates the economic, social, and foreign policy of the member-
states.

Blooms: Remember
Difficulty: 1 Easy
9-3
6. Economic theories suggest that free trade and investment is a positive-sum game, in which all
participating countries stand to gain.
TRUE
Economic theories of international trade predict that unrestricted free trade will allow countries
to specialize in the production of goods and services that they can produce most efficiently.
The result is greater world production than would be possible with trade restrictions. Opening a
country to free trade stimulates economic growth, which creates dynamic gains from trade.
Foreign direct investment (FDI) can transfer technological, marketing, and managerial know-
how to host nations. Thus economic theories suggest that free trade and investment is a
positive-sum game, in which all participating countries stand to gain.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-02 Understand the economic and political arguments for regional economic integration.
Topic: The Case for Regional Integration
7. In terms of regional economic integration, linking neighboring economies and making them
increasingly dependent on each other creates incentives for political cooperation between the
neighboring states.
TRUE
The political case for regional economic integration also has loomed large in several attempts
to establish free trade areas, customs unions, and the like. Linking neighboring economies and
making them increasingly dependent on each other creates incentives for political cooperation
between the neighboring states and reduces the potential for violent conflict. In addition, by
grouping their economies, the countries can enhance their political weight in the world.

Blooms: Understand
Difficulty: 2 Medium
9-4
8. Trade creation occurs when lower-cost external suppliers are replaced by higher-cost suppliers
within the free trade area.
FALSE
Trade creation occurs when high-cost domestic producers are replaced by low-cost producers
within the free trade area. It may also occur when higher-cost external producers are replaced
by lower-cost external producers within the free trade area.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-03 Understand the economic and political arguments against regional economic integration.
Topic: The Case Against Regional Integration
9. In theory, the World Trade Organization rules should ensure that a free trade agreement results
in trade diversion.
FALSE
In theory, the World Trade Organization rules should ensure that a free trade agreement does
not result in trade diversion. These rules allow free trade areas to be formed only if the
members set tariffs that are not higher or more restrictive to outsiders than the ones previously
in effect.

Blooms: Understand
9-5
10. With the signing of the Treaty of Rome in 1957, the European Free Trade Association was
established.
FALSE
With the signing of the Treaty of Rome in 1957, the European Community was established. The
name changed again in 1993 when the European Community became the European Union
following the ratification of the Maastricht Treaty.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's most important regional
economic agreements.
Topic: Regional Economic Integration in Europe
11. The European Commission is the ultimate controlling authority within the European Union
because draft legislation from the commission can become EU law only if the council agrees.
FALSE
The European Commission is responsible for proposing European Union (EU) legislation,
implementing it, and monitoring compliance with EU laws by member-states. Another
responsibility of the commission is to monitor member-states to make sure they are complying
with EU laws. In this policing role, the commission will normally ask a state to comply with any
EU laws that are being broken. If this persuasion is not sufficient, the commission can refer a
case to the Court of Justice. The European Council is considered the ultimate controlling
authority.

Blooms: Remember
Difficulty: 1 Easy
9-6
12 The European Council is composed of one representative from the government of each
member-state but the membership varies depending on the topic being discussed.
TRUE
The European Council represents the interests of member-states. The council is composed of
one representative from the government of each member-state. The membership, however,
varies depending on the topic being discussed.

Blooms: Remember
Difficulty: 1 Easy
13. The European Parliament is responsible for proposing European Union (EU) legislation,
implementing it, and monitoring compliance with EU laws by member-states.
FALSE
The European Parliament, which meets in Strasbourg, France, is primarily a consultative rather
than legislative body. It debates legislation proposed by the commission and forwarded to it by
the council. It can propose amendments to that legislation, which the commission and
ultimately the council are not obliged to take up but often will. The European Commission is
responsible for proposing European Union (EU) legislation, implementing it, and monitoring
compliance with EU laws by member-states.

Blooms: Remember
Difficulty: 1 Easy
9-7
14. The European Parliament, which meets in Strasbourg, France, is primarily a legislative rather
than consultative body.
FALSE
the council.

Blooms: Understand
15. By adopting the euro, the European Union has created the second most widely traded currency
in the world after that of the U.S. dollar.
TRUE
By adopting the euro, the European Union has created the second most widely traded currency
in the world after that of the U.S. dollar. Some believe that ultimately the euro could come to
rival the dollar as the most important currency in the world.

Blooms: Remember
Difficulty: 1 Easy
9-8
16. A disadvantage of the euro is that the development of a pan-European, euro-denominated
capital market will decrease the range of investment options open to both individuals and
institutions.
FALSE
An advantage of the euro is that the development of a pan-European, euro-denominated

capital market will increase the range of investment options open to both individuals and
institutions. This will enable European investors to better diversify their risk, which again lowers
the cost of capital, and should also increase the efficiency with which capital resources are
allocated.

Blooms: Understand
17. In an optimal currency area, 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.
TRUE
According to critics, a drawback of the euro is that the EU is not what economists would call an
optimal currency area. In an optimal currency area, 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. Many of the European economies in the euro zone,
however, are very dissimilar.

Blooms: Remember
Difficulty: 1 Easy
9-9
18. Since its establishment in January 1, 1999, the euro has steadily appreciated against the U.S.
dollar, reaffirming the ability of the European Central Bank to manage monetary policy within
the euro zone.
FALSE
Since its establishment in January 1, 1999, the euro has a volatile trading history against the
world's major currency, the U.S. dollar. After starting life in 1999 at €1 = $1.17, the euro steadily
fell until it reached a low of €1 = $0.83 in October 2000, leading critics to claim the euro was a
failure. A major reason for the fall in the euro's value was that international investors were
investing money in booming U.S. stocks and bonds and taking money out of Europe to finance
this investment.

Blooms: Understand
19. The Andean Pact was largely based on the European Union model and was highly successful at
achieving its stated goals.
FALSE
Bolivia, Chile, Ecuador, Colombia, and Peru signed an agreement in 1969 to create the Andean
Pact. The pact was largely based on the European Union model, but was far less successful at
achieving its stated goals.

Blooms: Remember
Difficulty: 1 Easy
Topic: Regional Economic Integration in the Americas
9-10
20. The Andean Community now operates as a customs union.
TRUE
In 1990, the heads of the five current members of the Andean Community—Bolivia, Ecuador,
Peru, Colombia, and Venezuela—met in the Galápagos Islands. The resulting Galápagos
Declaration effectively relaunched the Andean Pact, which was renamed the Andean
Community in 1997. The declaration's objectives included the establishment of a free trade area
by 1992, a customs union by 1994, and a common market by 1995. This last milestone has not
been reached. A customs union was implemented in 1995—although Peru opted out and
Bolivia received preferential treatment until 2003. The Andean Community now operates as a
customs union.

Blooms: Remember
Difficulty: 1 Easy
21. The basic objective of the Association of Southeast Asian Nations is to foster freer trade among
member countries and to achieve cooperation in their industrial policies.
TRUE
The basic objective of the Association of Southeast Asian Nations is to foster freer trade among
member countries and to achieve cooperation in their industrial policies. Progress has been
limited, however.

Blooms: Remember
Difficulty: 1 Easy
Topic: Regional Economic Integration Elsewhere
9-11
22. The concept of the “euro-consumer” is a myth.
TRUE
Consumer preferences vary much more across the European nations than the concept of the
“euro-consumer” allows which makes the concept a myth.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-05 Understand the implications for management practice that are inherent in regional economic
integration agreements.
Topic: Focus on Managerial Implications
23. Since the number of trade groups in the African continent is impressive, progress toward the
establishment of meaningful trade blocs has been fast.
FALSE
There are now nine trade blocs on the African continent. Many countries are members of more
than one group. Although the number of trade groups is impressive, progress toward the
establishment of meaningful trade blocs has been slow.

Blooms: Understand
9-12
24. The creation of a single market through regional economic integration offers significant
opportunities because markets that were formerly protected from foreign competition are
increasingly open.
TRUE
The creation of a single market through regional economic integration offers significant
increasingly open. For example, in Europe before 1992, the large French and Italian markets
were among the most protected. These markets are now much more open to foreign
competition in the form of both exports and direct investment.

Blooms: Understand
25. An advantage of the emergence of single markets is that the lowering of barriers to trade and
investment among countries has led to decreased price competition throughout the European
Union.
FALSE
Just as the emergence of single markets creates opportunities for business, it also presents a
number of threats. The lowering of barriers to trade and investment among countries has led to
increased price competition throughout the European Union and the North American Free
Trade Agreement.

Blooms: Understand
Learning Objective: 09-05 Understand the implications for management practice that are inherent in regional economic
integration agreements.
Topic: Regional Economic Integration Threats
9-13
Multiple Choice Questions
26. The six countries in the northern side of the Pacific Rim agreed to reduce and ultimately remove
tariff and nontariff barriers to the free flow of goods, services, and factors of production
between each other. The agreement among these countries is referred to as a
A. regional economic integration.

B. cross-cultural integration.
C. zoning agreement.
D. administrative trade policies.
E. balance-of-trade equilibrium.
Regional economic integration refers to agreements among countries in a geographic region to

reduce and ultimately remove tariff and nontariff barriers to the free flow of goods, services,
and factors of production between each other.

Blooms: Understand
Topic: Introduction
9-14
27. Which of the following is true with regard to regional economic integration?
A. Agreements designed to promote freer trade within regions have failed to produce gains
from trade for all member countries.
B. World Trade Organization members are not required to notify the organization of any
regional trade agreements in which they participate.
C. Regional economic integration is good for consumers because it lowers prices.
D. Regional economic integration benefits producers because they do not have to adapt to a
more competitive environment.
E. The movement toward regional economic integration has been most successful in Asia.
By creating a single market, countries aim to lower the price for goods and services across the
bloc. Such a policy is good for consumers, because it lowers prices, but it presents challenges to
some producers who have to adapt to a more competitive environment.

Blooms: Understand
Topic: Introduction
28. Where has the movement toward regional economic integration been most successful?
A. Africa
B. South America
C. North America
D. Europe
E. Asia
Nowhere has the movement toward regional economic integration been more successful than
in Europe. Today, the EU has a population of almost 500 million and a gross domestic product
of more than $18.5 trillion, making it slightly larger than the United States in economic terms.

9-15
Blooms: Remember
Difficulty: 1 Easy
Topic: Introduction
29. The countries of Mimbo, Juwan, and Ninot agreed to remove all barriers to the trade of goods
and services among each other. However, the three countries agreed that each would be
allowed to determine its own trade policies with regard to nonmembers. The economic
integration among these three countries is a(n)
A. free trade area.

B. customs union.
C. common market.
D. economic union.
E. political union.
Several levels of economic integration are possible in theory. From least integrated to most
integrated, the levels of economic integration are a free trade area, a customs union, a
common market, an economic union, and, finally, a full political union. In a free trade area, all
barriers to the trade of goods and services among member countries are removed. Each
country, however, is allowed to determine its own trade policies with regard to nonmembers.

Blooms: Apply
Difficulty: 3 Hard
30. The countries of Mesomia, Candera, Blauthop, and Rochus are committed to removing all
barriers to the free flow of goods and services between each other but want to pursue
independent external trade policies. The countries have in mind a(n)
A. free trade area.

B. customs union.
C. common market.
D. economic union.
E. political union.
9-16
Several levels of economic integration are possible in theory. From least integrated to most
integrated, the levels of economic integration are a free trade area, a customs union, a
common market, an economic union, and, finally, a full political union. In a free trade area, a
group of countries are committed to removing all barriers to the free flow of goods and
services between each other but pursue independent external trade policies.

Blooms: Apply
Difficulty: 3 Hard
31. Which of the following is defined as a group of countries committed to removing all barriers to
the free flow of goods and services between each other, but pursuing independent external
trade policies?
A. free trade area

B. command economy
C. efficient market
D. foreign exchange market
E. location economy
A free trade area refers to a group of countries committed to removing all barriers to the free
flow of goods and services between each other, but pursuing independent external trade
policies. In the theoretically ideal free trade area, no discriminatory tariffs, quotas, subsidies, or
administrative impediments are allowed to distort trade between members.

Blooms: Remember
Difficulty: 1 Easy
9-17
32. Eripria, Gautom, and Kasmonis, three countries in a specific geographic area decide to form a
free trade area. Which of the following is true with regard to their free trade area?
A. Factors of production are allowed to move freely between member nations.

B. Each member country is allowed to determine its own trade policies with regard to
nonmembers.
C. Member nations are required to have a common currency.
D. Member nations are required to have a common monetary and fiscal policy.
E. Member nations are required to have a central political apparatus that coordinates
economic, social, and foreign policy.
In a free trade area, each country is allowed to determine its own trade policies with regard to
nonmembers. Thus, for example, the tariffs placed on the products of nonmember countries
may vary from member to member.

Blooms: Apply
Difficulty: 3 Hard
9-18
33. Which of the following is the most popular form of regional economic integration, accounting
for almost 90 percent of regional agreements?
A. licensing agreements
B. economic unions
C. common markets
D. free trade agreements
E. political unions
are removed. Free trade agreements are the most popular form of regional economic
integration, accounting for almost 90 percent of regional agreements.

Blooms: Remember
Difficulty: 1 Easy
9-19
34. Which of the following is true of the European Free Trade Association (EFTA)?
A. The emphasis of EFTA has been on free trade in agricultural goods.

B. Industrial goods were left out of the trade arrangement, each member being allowed to
determine its own level of support.
C. Members cannot determine the level of protection applied to goods coming from outside
EFTA.
D. It was founded by those western European countries that initially decided not to be part of
the European Community.
E. It imposes a common tariff, of 5 to 20 percent, on products imported from outside.
The European Free Trade Association (EFTA) was founded by those western European countries
that initially decided not to be part of the European Community (the forerunner of the EU). Its
original members included Austria, Great Britain, Denmark, Finland, and Sweden, all of which
are now members of the EU.

Blooms: Understand
9-20
35. Three countries, close to each other in the Pacific Rim, enter into an agreement to remove all
tariffs and trade barriers between them. They decide on a common trade policy with regard to
nonmembers. Faced with political backlash, the countries stop short of allowing mobility of
factors of production such as labor and capital. Which of the following levels of economic
integration best describes this arrangement?
A. political union
B. customs union
C. common market
D. economic union
E. monetary union
A customs union is a group of countries committed to (1) removing all barriers to the free flow
of goods and services between each other and (2) the pursuit of a common external trade
policy.

Blooms: Understand
9-21
36. To spur trade, Cormoran, Brithea, and Asmakush decided on economic integration where there
were no barriers to trade between the three countries, they agreed on a common external
trade policy, and allowed factors of production to move freely between the three countries. In
short, the three countries formed a
A. command economy.
B. customs union.
C. common market.
D. efficient market.
E. free trade area.
external trade policy, and allows factors of production to move freely between members. Labor
cross-border flows of capital among member countries.

Blooms: Apply
Difficulty: 3 Hard
9-22
37. If seven countries formed a common market, which of the following would be a feature of their
trade agreement?
A. absence of a common external trade policy with regard to nonmembers

B. free movement of factors of production between member nations
C. establishment of barriers to the free flow of goods between member nations
D. lack of administrative machinery to oversee trade relations with nonmembers
E. mandatory use of a common currency among member nations
external trade policy, and allows factors of production to move freely between members.

Blooms: Understand
9-23
38. The six member countries of the Murasian Common Market are unhappy with the outcome of
their economic integration. They want something that entails a closer economic integration
and cooperation than a common market and want to pursue a common currency. They should
form a(n)
A. command economy.
B. customs union.
C. efficient market.
D. free trade area.
E. economic union.
An economic union entails even closer economic integration and cooperation than a common
market. Like the common market, an economic union involves the free flow of products and
factors of production among member countries and the adoption of a common external trade
policy, but it also requires a common currency, harmonization of members' tax rates, and a
common monetary and fiscal policy.

Blooms: Apply
Difficulty: 3 Hard
9-24
39. The fourteen member countries of BERPHO have a level of economic integration that involves
the use of a common currency, harmonization of members' tax rates, and a common monetary
and fiscal policy. BERPHO is an example of a(n)
A. free trade area.

B. customs union.
C. common market.
D. economic union.
E. command economy.
Like the common market, an economic union involves the free flow of products and factors of
production between member countries and the adoption of a common external trade policy,
but it also requires a common currency, harmonization of members' tax rates, and a common
monetary and fiscal policy.

Blooms: Apply
Difficulty: 3 Hard
9-25
40. SMEAN is an economic union of six geographically close countries. Which of the following is
true with regard to SMEAN?
A. There are restrictions on immigration, emigration, or cross-border flow of capital among

member countries.
B. It allows member countries to have their own individualized currency.
C. It involves the free flow of products and factors of production among member countries.
D. It has a central political apparatus that coordinates the economic, social, and foreign policy
of the member-states.
E. It does not have a common external trade policy.
Like the common market, an economic union involves the free flow of products and factors of
production among member countries and the adoption of a common external trade policy, but
it also requires a common currency, harmonization of members' tax rates, and a common
monetary and fiscal policy.

Blooms: Apply
Difficulty: 3 Hard
9-26
41. BERPHO, an economic union, wants to make a coordinating bureaucracy that is accountable to
the citizens of member nations. What BERPHO wants to do is called a(n)
A. political union.
B. customs union.
C. exclusive economic zone.
D. free trade agreement.
E. common market.
states.

Blooms: Apply
Difficulty: 3 Hard
9-27
42. The goal of ESASME, an economic union, is to have a Council of Ministers that would
coordinate the economic, social, and foreign policy of the member-states. ESASME wants to be
a
A. free trade area.

B. political union.
C. regional union.
D. common market.
E. command economy.
states.

Blooms: Apply
Difficulty: 3 Hard
9-28
43. Which of the following supports the economic case for regional economic integration?
A. International institutions such as the World Trade Organization have been moving the world
away from a free trade regime.
B. The greater the number of countries involved in a free trade agreement, the fewer the
perspectives that must be reconciled.
C. Coordination and policy harmonization problems are largely a function of the number of
countries that seek agreement.
D. It is difficult to establish a free trade and investment regime among a limited number of
adjacent countries as compared to the world community.
E. Since most governments do not intervene, unrestricted free trade and FDI have become a
reality.
Coordination and policy harmonization problems are largely a function of the number of
countries that seek agreement. The greater the number of countries involved, the more
perspectives that must be reconciled, and the harder it will be to reach agreement.

Blooms: Understand
9-29
44. Ghom Nartico, the head of state of Nuntica, wants to make a political case for regional
economic integration to his electorate. Which of the following would be a valid statement for
Nartico to make?
A. Linking neighboring economies increases the potential for violent conflict.

B. Free trade stimulates economic growth, which creates dynamic gains from trade.
C. Making neighboring economies increasingly dependent on each other fails to create
incentives for political cooperation.
D. Countries can enhance their political weight in the world by grouping their economies.
E. Those who have sought a united Europe have always had a desire to make another war in
Europe imminent.
Linking neighboring economies and making them increasingly dependent on each other create
incentives for political cooperation between the neighboring states and reduce the potential for
violent conflict. By grouping their economies, the countries can enhance their political weight in
the world.

Blooms: Apply
Difficulty: 3 Hard
9-30
45. Which of the following was a major consideration that underlay the establishment of the
European Community?
A. The pressing need to have a common currency that would make trade between European
and non-European countries easier
B. The need for a united Europe to deal with the United States and the politically alien Soviet
Union
C. The economic lessons from the Great Depression that hit the United States in the 1920s
D. The success of the European Free Trade Association formed by Western European countries
in 1960
E. The rise of communism in Europe in the 1960s
Many Europeans also believed that after World War II, the European nation-states were no
longer large enough to hold their own in world markets and politics. The need for a united
Europe to deal with the United States and the politically alien Soviet Union loomed large in the
minds of many of the European Community's founders.

Blooms: Understand
9-31
46. The Coalition for United Nuntica are opposed to Nuntica joining any regional trading bloc.
Which of the following are the two main impediments to regional economic integration that
they should emphasize in gaining support for their stance?
A. labor activism and political ideologies

B. immigration and political ideologies
C. costs and national sovereignty
D. political will and popular support
E. political ideologies and international policies
Despite the strong economic and political arguments in support, integration has never been
easy to achieve or sustain for two main reasons. First, although economic integration aids the
majority, it has its costs. While a nation as a whole may benefit significantly from a regional free
trade agreement, certain groups may lose. A second impediment to integration arises from
concerns over national sovereignty.

Blooms: Apply
Difficulty: 3 Hard
9-32
47. Which of the following is an example of concerns over national sovereignty acting as an
impediment to regional economic integration?
A. Organization of the Petroleum Exporting Countries regulating the supply of petroleum as a

cartel
B. Asia-Pacific Economic Cooperation failing to establish itself as a regional arrangement
C. admission of Eastern European nations into the European Union
D. Great Britain refusing to adopt the common currency of the European Union, the euro
E. rise of the World Trade Organization
To achieve full economic union, the EU introduced a common currency, the euro, controlled by
a central EU bank. Although most EU member-states have signed on, Great Britain remains an
important holdout. A politically important segment of public opinion in that country opposes a
common currency on the grounds that it would require relinquishing control of the country's
monetary policy to the EU, which many British perceive as a bureaucracy run by foreigners.

Blooms: Understand
9-33
48. After the formation of BERPHO, a free trade area for its member countries, Nuntica found that
its high-cost domestic producers were replaced by low-cost producers within the free trade
area. This is an example of
A. value creation.
B. strategic pricing.
C. trade creation.
D. trade diversion.
E. economic exposure.
by lower-cost external producers within the free trade area.

Blooms: Apply
Difficulty: 3 Hard
9-34
49. As a result of the formation of a free trade area between six member countries in the Pacific
Rim, the member country of Rimho found that its lower-cost external suppliers were replaced
by higher-cost suppliers within the free trade area. This is an example of
A. trade creation.
C. synergy.
D. trade diversion.
E. protectionism.
Trade diversion occurs when lower-cost external suppliers are replaced by higher-cost suppliers
within the free trade area. A regional free trade agreement will benefit the world only if the
amount of trade it creates exceeds the amount it diverts.

Blooms: Apply
Difficulty: 3 Hard
50. A regional free trade agreement will benefit the world only if
A. it raises the standard of living in one of the member countries.

B. the amount of trade it creates exceeds the amount it diverts.
C. the currencies of the nations involved appreciate.
D. the balance-of-trade situation remains stable in the region.
E. it creates trade surplus for one of the countries involved.
within the free trade area. A regional free trade agreement will benefit the world only if the

Blooms: Understand
9-35
51. The country of Argonia and the country of Berylia imposed tariffs on imports from all countries.
They set up a free trade area, removing all trade barriers between themselves but maintaining
tariffs on imports from the rest of the world. Argonia now begins to import sugar from Berylia.
Previously, Argonia was indigenously producing sugar at a higher cost. Thus, Argonia benefits
from this transaction. This is known as
A. trade creation.
C. synergy.
D. trade diversion.
E. Protectionism.
within a free trade area. A regional free trade agreement will benefit the world only if the
AACSB: Reflective Thinking

Blooms: Apply
Difficulty: 3 Hard
52. As a result of the formation of BERPHO, a free trade area consisting of six member countries,
higher cost external fabric producers were replaced by lower-cost external fabric producers
within the free trade area. This is known as
A. trade creation.
C. synergy.
D. trade diversion.
E. protectionism.
9-36
within a free trade area. A regional free trade agreement will benefit the world only if the

Blooms: Apply
Difficulty: 3 Hard
53. Suppose the country of Ceria and Lithinia imposed tariffs on imports from all countries, and
then they set up a free trade area, scrapping all trade barriers between themselves but
maintaining tariffs on imports from the rest of the world. Now, Ceria begins to import sugar
from Lithinia. However, Ceria had previously been importing sugar from another country,
Cadnia, which produced sugar more cheaply than Ceria or Lithinia. This is an example of
A. trade creation.
C. synergy.
D. trade diversion.
E. protectionism.
within the free trade area.

Blooms: Apply
Difficulty: 3 Hard
9-37
54. Which of the following are significant trade blocs in Europe?
A. European Union and the European Free Trade Association

B. European Federation and the European Trade Block
C. European Commission and the COMINTERN
D. European Federation and the European Trade Association
E. European Economic Community and the European Federation
Europe has two trade blocs—the European Union and the European Free Trade Association.

Blooms: Remember
Difficulty: 1 Easy
55. Which of the following is a factor that resulted in the establishment of the European Union
(EU)?
A. spectacular success of the North American Free Trade Agreement (NAFTA)

B. trade impasse following the oil crisis in the 1970s that occurred due to collusion among oil
producing nations
C. devastation of Western Europe during two world wars and the desire for a lasting peace
D. emergence of Japan as an economic and industrial superpower despite the nuclear
holocaust
E. rise of communism in Europe
The European Union (EU) is the product of two political factors: (1) the devastation of Western
Europe during two world wars and the desire for a lasting peace, and (2) the European nations'
desire to hold their own on the world's political and economic stage.

Blooms: Understand
9-38
56. The European Community was established with the signing in 1957 of the Treaty of
A. Paris.
B. Brussels.
C. Switzerland.
D. Rome.
E. Lisbon.
name changed again in 1993 when the European Community became the European Union.

Blooms: Remember
Difficulty: 1 Easy
57. The European Community became the European Union in 1993 following the ratification of the
A. Maastricht Treaty.
B. Warsaw Pact.
C. Treaty of Rome.
D. Single European Act.
E. Lisbon Treaty.
name changed again in 1993 when the European Community became the European Union
following the ratification of the Maastricht Treaty.
9-39
Blooms: Remember
Difficulty: 1 Easy
58. Which of the following is true of the Treaty of Rome?
A. It obliged all European Union members to adopt the euro.

B. It committed the European Community to establish common policies in agriculture and
transportation.
C. It called for the establishment of internal trade barriers.
D. It allowed members to determine the level of protection applied to goods coming from
outside.
E. It called for the abolition of a common external tariff.
The Treaty of Rome provided for the creation of a common market. To facilitate the free
movement of goods, services, and factors of production, the treaty provided for any necessary
harmonization of the member-states' laws. Furthermore, the treaty committed the EC to
establish common policies in agriculture and transportation.

Blooms: Understand
9-40
59. Which of the following is responsible for proposing European Union legislation, implementing
it, and monitoring compliance with European Union laws by member-states?
A. Council of the European Union

B. European Commission
C. European Parliament
D. Court of Justice
E. European Community
The European Commission is responsible for proposing EU legislation, implementing it, and
monitoring compliance with EU laws by member-states. Headquartered in Brussels, Belgium,
the commission has more than 24,000 employees.

Blooms: Remember
Difficulty: 1 Easy
60. Which of the following institutions has a monopoly in proposing European Union legislation?
A. Council of the European Union

B. Court of Justice
C. European Commission
D. European Parliament
The European Commission has a monopoly in proposing European Union legislation. The
commission makes a proposal, which goes to the Council of the European Union and then to
the European Parliament.

Blooms: Remember
9-41
Difficulty: 1 Easy
61. Which of the following is true about the European Commission?
A. The European Union's competition commissioner has been gaining influence as the chief
regulator of competition policy in the member nations of the European Union.
B. The European Commission has to be approved by the Council of the European Union
before it can begin work.
C. The European Commission does not have a policing role with respect to European Union
laws.
D. The legislation proposed by the European Commission goes directly to the European
Parliament.
E. The European Commission is the ultimate controlling authority within the European Union.
The European Commission's role in competition policy has become increasingly important to
business in recent years. Since 1990 when the office was formally assigned a role in competition
policy, the European Union's competition commissioner has been steadily gaining influence as
the chief regulator of competition policy in the member nations of the European Union.

Blooms: Understand
9-42
62. Which of the following is considered to be the ultimate controlling authority within the
European Union?
A. Court of Justice
B. European Commission
C. European Council
The European Council represents the interests of member-states. It is clearly the ultimate
controlling authority within the European Union (EU) because draft legislation from the
commission can become EU law only if the council agrees. The council is composed of one
representative from the government of each member-state.

Blooms: Remember
Difficulty: 1 Easy
9-43
63. The European Council is considered to be the ultimate controlling authority within the
European Union (EU) because
A. it monitors member-states to make sure they are complying with EU laws.

B. it has a monopoly in proposing EU legislation.
C. it has 751 members that are directly elected by the populations of the member-states.
D. draft legislation from the European Commission can become EU law only if the council
agrees.
E. it is the supreme appeals court for EU law.
controlling authority within the EU since draft legislation from the commission can become EU
law only if the council agrees.

Blooms: Understand
64. Which of the following has 751 members as of 2016, and is directly elected by the populations
of the member-states?
A. Court of Justice
B. European Council
C. European Commission
The European Parliament, which as of 2016 has 751 members, is directly elected by the
populations of the member-states. The parliament, which meets in Strasbourg, France, is
primarily a consultative rather than legislative body.
9-44
Blooms: Remember
Difficulty: 1 Easy
65. Which of the following meets in Strasbourg, France, is primarily a consultative rather than a
legislative body, and debates legislation proposed by the commission and forwarded to it by
the council?
A. European Parliament
B. European Central Bank
C. Court of Justice
D. European Free Trade Association
the council. It can propose amendments to that legislation, which the commission and
ultimately the council are not obliged to take up but often will.

Blooms: Remember
Difficulty: 1 Easy
9-45
66. Which of the following is true about the European Parliament?
A. It cannot propose amendments to legislations.

B. It is directly elected by the populations of the member-states.
C. It is primarily a legislative body rather than a consultative body.
D. It does not have the right to veto laws such as single-market legislation.
E. The European Parliament does not have the right to vote on the appointment of
commissioners.
The European Parliament, which as of 2016 has 751 members, is directly elected by the
populations of the member-states. The parliament, which meets in Strasbourg, France, is
primarily a consultative rather than legislative body.

Blooms: Understand
67. Which of the following is true of the Treaty of Lisbon that was signed in 2007?
A. It defined the European Commission's role in competition policy.

B. It brought the commission to the court for failure to act according to a European Union
treaty.
C. It created the position of the president of the European Council.
D. It lifted barriers to competition in the retail banking and insurance businesses.
E. It created the Court of Justice, the supreme appeals court for European Union law.
The Treaty of Lisbon also creates a new position, a president of the European Council, who
serves a 30-month term and represents the nation-states that make up the European Union.

Blooms: Understand
9-46
68. Which of the following is true of the Court of Justice?
A. The judges are required to act as representatives of national interests.

B. It comprises several judges from a few selected countries.
C. It is the supreme appeals court for European Union law.
D. A member country cannot bring another member country to this court.
E. Member countries cannot bring the commission or the council to this court.
The Court of Justice, which is comprised of one judge from each country, is the supreme
appeals court for EU law. Like commissioners, the judges are required to act as independent
officials, rather than as representatives of national interests.

Blooms: Understand
9-47
69. Which of the following was a change proposed by the Single European Act?
A. establish frontier controls among European Community countries

B. increase the resources required for complying with trade bureaucracy
C. place barriers to competition in the retail banking and insurance businesses
D. apply the principle of "mutual recognition" to product standards
E. reduce costs directly by not allowing lower-cost suppliers into national economies
The purpose of the Single European Act was to have one market in place by December 31,
1992. The act proposed to apply the principle of "mutual recognition" to product standards. A
standard developed in one European Community country should be accepted in another,
provided it meets basic requirements in such matters as health and safety.

Blooms: Understand
70. The _____ proposed that all impediments to the formation of a single market be eliminated by
December 31, 1992, resulting in the Single European Act.
A. Delors Commission
B. Andean Pact
C. Treaty of Rome
D. North American Free Trade Agreement
E. Maastricht Treaty
Under the chairmanship of Jacques Delors, the commission proposed that all impediments to
the formation of a single market be eliminated by December 31, 1992. The result was the Single
European Act, which was independently ratified by the parliaments of each member country
and became EC law in 1987.
9-48
Blooms: Remember
Difficulty: 1 Easy
71. Which of the following is true of the Single European Act?
A. It proposed to place frontier controls among European Community countries.

B. It sought to abolish the application of the principle of "mutual recognition" to product
standards.
C. It proposed to reduce costs indirectly by preventing national suppliers to compete.
D. It provided the impetus for the restructuring of substantial sections of European industry.
E. It proposed to reduce costs directly by preventing lower-cost suppliers into national
economies.
The Single European Act provided the impetus for the restructuring of substantial sections of
European industry. Many firms have shifted from national to pan-European production and
distribution systems in an attempt to realize scale economies and better compete in a single
market.

Blooms: Understand
9-49
72. The _____ committed European Community members to adopt a common currency by January
1, 1999
A. Maastricht Treaty
B. Treaty of Rome
C. Treaty of Lisbon
D. Montreal Treaty
E. Treaty of Paris
In February 1992, European Community members signed the Maastricht Treaty that committed
them to adopting a common currency by January 1, 1999.

Blooms: Remember
Difficulty: 1 Easy
73. The euro zone is comprised of the
A. 27 member nations of the European Union

B. member nations of the European Union and the applicants to the union
C. 19 member nations who use the euro as their currency
D. member nations of the European Union and countries who have pegged their currencies to
the euro
E. 21 member nations that have their members in the European Parliament
The euro is now used by 19 of the 28 member-states of the European Union; these 19 states are
members of what is often referred to as the euro zone. It encompasses 330 million EU citizens
and includes the powerful economies of Germany and France.

Blooms: Remember
9-50
74. Which of the following countries has adopted the euro as its currency?
A. Great Britain
B. France
C. Denmark
D. Sweden
E. Switzerland
The euro is now used by 19 of the 28 member-states of the European Union; these 19 states are
members of what is often referred to as the euro zone. It encompasses 330 million EU citizens
and includes the powerful economies of Germany and France.

Blooms: Remember
Difficulty: 1 Easy
9-51
75. Establishment of the euro required participating national governments to
A. have a sound fiscal situation.

B. have stable exchange rates.
C. be democratic in nature.
D. give up control over monetary policy.
E. have a high degree of price stability.
Establishment of the euro was an amazing political feat with few historical precedents. It
required participating national governments to give up their own currencies and national
control over monetary policy.

Blooms: Understand
76. The member countries of BERPHO, a regional free trade area wanted to adopt a common
currency, the “BERPH.” The “BERPH” was modeled after and, in fact, was exactly similar to the
euro. Establishment of the “BERPH” requires participating national governments to
A. have a sound fiscal situation.

B. have stable exchange rates.
C. be democratic in nature.
D. give up control over monetary policy.
E. have a high degree of price stability.
Establishment of the euro was an amazing political feat with few historical precedents. It
required participating national governments to give up their own currencies and national
control over monetary policy.

9-52
Blooms: Apply
Difficulty: 3 Hard
77. The price of a bouquet of roses in France is 4 euros. Tom Smith, a frequent international
traveler found that a similar bouquet of roses cost only 3 euros in Germany. A benefit of
adopting the euro as a common currency is that it
A. makes it easier to compare prices across Europe.

B. makes Europe an optimal currency area.
C. increases the range of investment options open only to institutions.
D. leads to higher prices, which translate into substantial gains for European producers.
E. decreases competition because it has become harder for consumers to shop around.
A benefit of adopting the euro is that the adoption of a common currency makes it easier to
compare prices across Europe. This has increased competition because it has become easier for
consumers to shop around.

Blooms: Apply
Difficulty: 3 Hard
9-53
78. A key advantage of adopting the euro is that it
A. helps in reduction of competition in Europe.

B. has prevented the development of a highly liquid pan-European capital market.
C. lowers foreign exchange and hedging costs in Europe.
D. insulates Europe from international competition.
E. increases the range of investment options open to institutions only.
Europeans decided to establish a single currency in the EU for a number of reasons. They
believe that businesses and individuals will realize significant savings from having to handle one
currency, rather than many. These savings come from lower foreign exchange and hedging
costs.

Blooms: Understand
79. Over time the euro will impact the pan-European capital market by leading to
A. an increase in the cost of capital.

B. a decline in the overall level of savings and investment.
C. an increased efficiency with which investment funds are allocated.
D. reduced liquidity in the market.
E. reduced competition among European producers.
The introduction of a common currency has given a boost to the development of a highly
liquid pan-European capital market. Over time, the development of such a capital market
should lower the cost of capital and lead to an increase in both the level of investment and the
efficiency with which investment funds are allocated.

9-54
Blooms: Understand
80. Which of the following is a drawback of adopting the euro?
A. loss of control over national monetary policy

B. increase in the cost of capital
C. reduction in the liquidity of capital markets
D. reduction of price differentials within the euro zone
E. loss of investment options open to both individuals and institutions
The drawback of adopting the euro is that national authorities have lost control over monetary
policy. 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.

Blooms: Understand
9-55
81. The Maastricht Treaty called for
A. establishment of the independent European Central Bank (ECB).

B. the abolition of restrictions on cabotage.
C. establishment of the European Parliament.
D. the formation of a single market for the European Union.
E. placing restrictions on foreign exchange transactions between member countries.
The Maastricht Treaty called for establishment of the independent European Central Bank
(ECB), similar in some respects to the U.S. Federal Reserve, with a clear mandate to manage
monetary policy so as to ensure price stability.

Blooms: Remember
Difficulty: 1 Easy
82. Which of the following is the reason that Great Britain, Denmark, and Sweden have stayed out
of the euro zone?
A. dollar peg advocated by some members of the European Union

B. implied loss of national sovereignty to the European Central Bank
C. volatility of the euro
D. reluctance to compete directly against the U.S. dollar
E. reluctance to be considered an optimal currency area
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. Many in these
countries are suspicious of the ECB's ability to remain free from political pressure and to keep
inflation under tight control.

9-56
Blooms: Understand
83. Minto and Maily, two neighboring countries, have the same wage rates, tax regimes, and
business cycles. In addition, the two countries have reacted similarly to past economic shocks.
Minto and Maily can adopt a common currency because they form a(n)
A. managed currency zone.

B. open exchange regime.
C. optimal currency area.
D. free trade area.
E. advanced monetary zone.
In an optimal currency area, similarities in the underlying structure of economic activity make it

Blooms: Apply
Difficulty: 3 Hard
84. Finland and Portugal have different wage rates, tax regimes, and business cycles. The two
countries have also reacted differently in the past to external economic shocks. The
dissimilarities are an example of one of the drawbacks of the euro that economists refer to as
the EU not being in a(n)
A. managed currency zone.

B. open exchange regime.
C. optimal currency area.
D. free trade area.
9-57
E. advanced monetary zone.
In an optimal currency area, similarities in the underlying structure of economic activity make it

Blooms: Apply
Difficulty: 3 Hard
85. Which of the following is true of the euro since its establishment in 1999?
A. The value of the euro has been stable against the U.S. dollar.
B. The euro's value has steadily appreciated against the U.S. dollar.
C. The euro's value initially appreciated and then steadily depreciated against the U.S. dollar.
D. The euro has had a volatile trading history against the U.S. dollar.
E. The value of the euro has been constant when compared to the U.S. dollar.
Since its establishment on January 1, 1999, the euro has a volatile trading history against the
world's major currency, the U.S. dollar.

Blooms: Understand
9-58
86. Which of the following refers to a permanent bailout fund, worth about €500 billion, set up by
the euro zone nations to restore confidence in the euro?
A. European Fiscal Union

B. European Fiscal Compact
C. Troubled Assets Relief Program
D. European Stability Mechanism
E. European Financial Stability Facility
Due to the economic slowdown following the 2008-2009 global financial crisis, the euro zone
nations set up a permanent bailout fund—the European Stability Mechanism—worth about
€500 billion, which was designed to restore confidence in the euro.

Blooms: Remember
Difficulty: 1 Easy
87. Binopa wanted to apply for membership to the European Union. Its application was, however,
rejected. Which of the following is likely to have been the cause of Binopa’s rejection?
A. It nationalized private assets.

B. It adopted EU laws.
C. It tamed inflation.
D. It refrained from restructuring industries.
E. It deregulated markets.
To qualify for EU membership, the applicants had to privatize state assets, deregulate markets,
restructure industries, and tame inflation. They also had to enshrine complex EU laws into their
own systems, establish stable democratic governments, and respect human rights.

Blooms: Apply
9-59
Difficulty: 3 Hard
88. Which of the following is true of the provisions of the North American Free Trade Agreement?
A. It does not allow financial institutions unrestricted access to the Mexican market.
B. It abolishes special treatment (protection) given to Mexican energy and railway industries.
C. It allows lowering of national environmental standards to lure investment.
D. It seeks the removal of most barriers on the cross-border flow of services.
E. It does not deal with the protection of intellectual property rights.
The contents of the North American Free Trade Agreement include removal of most barriers on
the cross-border flow of services, allowing financial institutions, for example, unrestricted access
to the Mexican market by 2000.

Blooms: Understand
9-60
89. Which of the following is an expected consequence of the implementation of the North
American Free Trade Agreement?
A. Low-skilled jobs will be moved out to Mexico resulting in lowering of average wage rates in
the United States and Canada.
B. Increased imports from Mexico will help reduce the huge trade deficit for United States and
Canada.
C. Lower incomes of the Mexicans would allow them to import fewer U.S. and Canadian
goods, thereby decreasing demand.
D. A large number of Mexican firms will hire low-skilled workers from the United States.
E. Some U.S. and Canadian firms would move production to Mexico to take advantage of
lower labor costs.
Proponents of the North American Free Trade Agreement (NAFTA) have argued that the free
trade area should be viewed as an opportunity to create an enlarged and more efficient
productive base for the entire region. Advocates acknowledge that one effect of NAFTA would
be that some U.S. and Canadian firms would move production to Mexico to take advantage of
lower labor costs.

Blooms: Understand
9-61
90. An argument against the North American Free Trade Agreement centered on the fear that
ratification would result in
A. low interest rates in the Unites States and Canada.

B. mass exodus of jobs from the United States into Mexico.
C. a move toward a common currency for NAFTA member nations.
D. competition from the members of the European Union.
E. high inflation in the United States and Canada.
Those who opposed the North American Free Trade Agreement claimed that ratification would
be followed by a mass exodus of jobs from the United States and Canada into Mexico as
employers sought to profit from Mexico's lower wages and less strict environmental and labor
laws.

Blooms: Understand
9-62
91. Which of the following is a significant impact of the North American Free Trade Agreement
(NAFTA)?
A. It led to decreased economic stability in Canada.

B. It led to a major trade deficit for Canada.
C. It helped create the background for increased political stability in Mexico.
D. It led to a trade surplus for all the three member nations.
E. It led to a reduction in purchasing power of consumers in America.
Many observers credit the North American Free Trade Agreement (NAFTA) with helping to
create the background for increased political stability in Mexico. For most of the post-NAFTA
period, Mexico has been viewed as a stable democratic nation with a steadily growing
economy, something that is beneficial to the United States, which shares a 2,000-mile border
with the country.

Blooms: Understand
9-63
92. Which of the following is a major issue confronting the North American Free Trade
Agreement?
A. economic stability
B. reduction in purchasing power
C. political stability
D. expanding the membership of the agreement
E. lack of resources
One issue confronting the North American Free Trade Agreement (NAFTA) is that of
enlargement. A number of other Latin American countries have indicated their desire to
eventually join NAFTA. The governments of both Canada and the United States are adopting a
wait-and-see attitude with regard to most countries.

Blooms: Remember
Difficulty: 1 Easy
93. The _____ is a 1969 agreement among Bolivia, Chile, Ecuador, Colombia, and Peru to establish a
customs union.
A. Andean Pact
B. ASEAN
C. Mercosur
D. CARICOM
E. Caribbean Single Market and Economy
Bolivia, Chile, Ecuador, Colombia, and Peru signed an agreement in 1969 to create the Andean
Pact. The Andean Pact was largely based on the European Community model, but was far less
successful at achieving its stated goals.
9-64
Blooms: Remember
Difficulty: 1 Easy
94. Which of the following is true of the Andean Pact of 1969?
A. Political and economic problems seem to have hindered cooperation among member
countries of the Andean Pact.
B. By the mid-1980s, the Andean Pact achieved most of its stated objectives.
C. The dominant political ideology in many of the Andean countries tended toward the
democratic end of the political spectrum.
D. The Galápagos Declaration effectively replaced the Andean Pact in 1997.
E. The Andean Pact sought to remove a common external tariff.
Political and economic problems seem to have hindered cooperation among member
countries. The countries of the Andean Pact have to deal with low economic growth,
hyperinflation, high unemployment, political unrest, and crushing debt burdens.

Blooms: Understand
9-65
95. Which of the following is true of the Andean Pact during the mid-1980s?
A. Tariff-free trade existed between member countries.

B. Harmonization of economic policies between member countries had been achieved.
C. Successful integration of member economies had been achieved.
D. The Pact had failed to achieve the objective of a common external tariff.
E. The dominant political ideology in many of the Andean countries tended toward
democracy.
By the mid-1980s, the Andean Pact had all but collapsed and had failed to achieve any of its
stated objectives. There was no tariff-free trade between member countries, no common
external tariff, and no harmonization of economic policies.

Blooms: Remember
Difficulty: 1 Easy
96. The Andean Community now operates as a(n)
A. common market.
B. economic union.
C. customs union.
D. command economy.
E. political union.
The Galápagos Declaration effectively relaunched the Andean Pact, which was renamed the
Andean Community in 1997. The Andean Community now operates as a customs union.

Blooms: Remember
Difficulty: 1 Easy
9-66
97. _____ is a pact that originated in 1988 to establish a free trade area now including Argentina,
Brazil, Paraguay, and Uruguay.
A. ASEAN
B. NAFTA
C. Mercosur
D. CARICOM
E. CAFTA
Mercosur refers to a pact among Argentina, Brazil, Paraguay, and Uruguay to establish a free
trade area. Mercosur originated in 1988 as a free trade pact between Brazil and Argentina. The
modest reductions in tariffs and quotas accompanying this pact reportedly helped bring about
an 80 percent increase in trade between the two countries in the late 1980s. This success
encouraged the expansion of the pact in March 1990 to include Paraguay and Uruguay. In
2006, the pact was further expanded when Venezuela joined Mercosur, although it may take
years for Venezuela to become fully integrated into the pact.

Blooms: Remember
Difficulty: 1 Easy
9-67
98. Which of the following is true of Alexander Yeats's criticism of Mercosur?
A. He pointed out that the slowest growing items in intra-Mercosur trade were cars, buses,
agricultural equipment, and other capital-intensive goods.
B. He believed that the trade creation effects of Mercosur outweighed its trade diversion
effects.
C. He felt that Mercosur countries were prepared to compete globally once the group's
external trade barriers came down.
D. He pointed out that Mercosur countries were insulated from outside competition by tariffs
that run as high as 70 percent of value.
E. He felt that capital was being drawn toward more efficient enterprises.
Mercosur had its critics, including Alexander Yeats, a senior economist at the World Bank, who
wrote a stinging critique. Yeats pointed out that the fastest growing items in intra-Mercosur
trade were cars, buses, agricultural equipment, and other capital-intensive goods that are
produced relatively inefficiently in the four member countries.

Blooms: Understand
9-68
99. Which of the following is a reason why Mercosur was temporarily suspended in 2001?
A. dotcom bust in Paraguay

B. economic crisis in Argentina
C. exit of Uruguay from the group
D. devaluation of the Mexican peso
E. Venezuelan financial crisis
Mercosur hit a significant roadblock in 1998, when its member-states slipped into recession and
intrabloc trade slumped. Things deteriorated further in 2001 when Argentina, beset by
economic stresses, suggested the customs union be temporarily suspended.

Blooms: Remember
Difficulty: 1 Easy
100. _____ is a trade pact among Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua,
which began in the early 1960s but collapsed in 1969 due to war.
A. Central American Common Market

B. Free Trade Area of the Americas
C. Caribbean Single Market and Economy
D. Mercosur
E. CARICOM
In the early 1960s, Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua attempted to
set up a Central American Common Market. It collapsed in 1969 when war broke out between
Honduras and El Salvador after a riot at a soccer match between teams from the two countries.

Blooms: Remember
9-69
Difficulty: 1 Easy
101. As a result of _____, the Central American Common Market collapsed in 1969.
A. the devaluation of the Brazilian currency by 40 percent

B. a coup in Nicaragua that led to the overthrow of the incumbent regime
C. war between Honduras and El Salvador after a riot at a soccer match between teams from
the two countries
D. the withdrawal from the trade arrangement by Costa Rica
E. the collapse of monetary policy between Costa Rica and El Salvador

Blooms: Understand
9-70
102. The agreement of the member-states of the Central American Common Market joined by the
Dominican Republic to trade freely with the United States is known as the
A. Central American Free Trade Agreement.

B. Central American Common Market.
C. Free Trade Area of the Americas.
D. CARICOM.
E. Caribbean Single Market and Economy.
The agreement of the member-states of the Central American Common Market joined by the
Dominican Republic to trade freely with the United States is known as the Central America Free
Trade Agreement, or CAFTA.

Blooms: Remember
Difficulty: 1 Easy
9-71
103. Which of the following is the aim of the Central America Free Trade Agreement?
A. Lowering of trade barriers between the United States and the Central American Common
Market countries
B. Elimination of trade barriers between the CARICOM and Central American Common Market
countries
C. Reduction of trade barriers between Caribbean Single Market and Economy nations and
Central American Common Market countries
D. Introduction of a common currency for Costa Rica, El Salvador, Guatemala, Honduras, and
Nicaragua
E. Reductions in tariffs and quotas between Costa Rica, Dominican Republic, and Nicaragua
The aim of the Central America Free Trade Agreement (CAFTA) is to lower trade barriers
between the United States and the six countries that formed the Central American Common
Market for most goods and services.

Blooms: Remember
Difficulty: 1 Easy
9-72
104. Which of the following refers to an association of English-speaking Caribbean states that are
attempting to establish a customs union?
A. CARICOM
B. Central American Free Trade Agreement
C. Central American Common Market
D. Free Trade Area of the Americas
E. Caribbean Single Market and Economy
A customs union was to have been created in 1991 between the English-speaking Caribbean
countries under the auspices of the Caribbean Community. Referred to as CARICOM, it was
established in 1973. However, it repeatedly failed to progress toward economic integration.

Blooms: Remember
Difficulty: 1 Easy
105. The goal of the Caribbean Single Market and Economy is to
A. remove all trade barriers between member nations in practice.

B. establish a political union.
C. adopt a common currency.
D. harmonize macroeconomic and monetary policy between member-states.
E. establish an economic union.
In early 2006, six CARICOM members established the Caribbean Single Market and Economy
(CSME). Modeled on the EU's single market, CSME's goal is to lower trade barriers and
harmonize macroeconomic and monetary policy between member-states.

Blooms: Understand
9-73
106. Which of the following countries is NOT a member of the Central American Common Market?
A. Mexico
B. Costa Rica
C. El Salvador
D. Guatemala
E. Honduras
Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua were the original founding
members of the Central American Common Market. They were later joined by the Dominican
Republic.

Blooms: Understand
9-74
107. The _____ was an attempt to establish a free trade area between Brunei, Cambodia, Indonesia,
Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.
A. Asia-Pacific Economic Cooperation

B. South Asian Association for Regional Cooperation
C. Asian Clearing Union
D. Association of Southeast Asian Nations
E. Maastricht Treaty
The Association of Southeast Asian Nations (ASEAN) is an attempt to establish a free trade area
between Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore,
Thailand, and Vietnam, leading to a regional grouping of 600 million people with a combined
GDP of some $2 trillion.

Blooms: Remember
Difficulty: 1 Easy
108. Vietnam is a member of
A. CARICOM.
B. APEC.
C. AFTA.
D. FTAA.
E. CSME.
Vietnam joined the AFTA (an ASEAN Free-Trade Area) in 2006.

Blooms: Understand
9-75
109. The Central America Free Trade Agreement (CAFTA) is a 2004 agreement between the
members of the Central American Common Market and
A. the United States.

B. Canada.
C. the European Union.
D. Mexico.
E. Brazil.
The Central America Free Trade Agreement (CAFTA) aims to lower trade barriers between the
United States and the six member countries of the Central American Common Market for most
goods and services.

Blooms: Understand
9-76
110. Which of the following is true of the East African Community (EAC)?
A. Its program includes cooperation on immigration, road and telecommunication networks,

investment, and capital markets.
B. Its aim is to eliminate import tariffs among the six original members.
C. It is the world's largest free trade area.
D. It seeks to apply national environmental standards, provided such standards have a scientific
basis.
E. It seeks to protect intellectual property rights.
The most recent attempt to reenergize the free trade movement in Africa occurred in early
2001, when Kenya, Uganda, and Tanzania, member-states of the East African Community (EAC),
committed themselves to relaunching their bloc, 24 years after it collapsed. Their program
includes cooperation on immigration, road and telecommunication networks, investment, and
capital markets.

Blooms: Understand
9-77
111. Which of the following is a threat facing the emergence of single markets?
A. getting engulfed in a trade war

B. increased price competition throughout the European Union
C. increase in price differentials across nations
D. reduced environmental standards in order to lure investments
E. overabundance of greenfield investments
Just as the emergence of single markets creates opportunities for business, it also presents a
number of threats. The lowering of barriers to trade and investment between countries is likely
to lead to increased price competition throughout the European Union and the North American
Free Trade Agreement.

Blooms: Understand
Essay Questions
9-78
112. Briefly describe the concept of regional economic integration.
By regional economic integration we mean agreements among countries in a geographic

region to reduce, and ultimately remove, tariff and nontariff barriers to the free flow of goods,
services, and factors of production between each other.
Some examples of regional economic integration include the North America Free Trade
Agreement (NAFTA), which went into effect in December 1992. By creating a single market,
NAFTA aimed to lower the price for goods and services in the United States, Canada, and
Mexico. On January 1, 1993, the European Union formally removed many barriers to doing
business across borders within the EU in an attempt to create a single market with 340 million
consumers. There are also active attempts at regional economic integration in Central America,
the Andean region of South America, Southeast Asia, and parts of Africa.
Such a policy is good for consumers, because it lowers prices, but it may present challenges to
some producers who have to adapt to a more competitive environment. The past two decades
have witnessed an unprecedented proliferation of regional trade blocs that promote regional
economic integration. World Trade Organization (WTO) members are required to notify the
WTO of any regional trade agreements in which they participate. By 2010, nearly all of the
WTO's members had notified the organization of participation in one or more regional trade
agreements.

Blooms: Understand
Topic: Introduction
9-79
113. Differentiate between a free trade area and a customs union. Provide an example of each form
of economic integration.
are removed. In a theoretically ideal free trade area, no discriminatory tariffs, quotas, subsidies,
or administrative impediments are allowed to distort trade between member nations. Each
country, however, is allowed to determine its own trade policies with regard to nonmembers.
The European Free Trade Association (EFTA) involving Norway, Iceland, Liechtenstein, and
Switzerland, is an example of a free trade area.
A customs union eliminates trade barriers between member countries and adopts a common
external policy. The current version of the Andean Community (formerly known as the Andean
Pact) among Bolivia, Colombia, Ecuador, and Peru is an example of a customs union.
Though countries in both free trade areas and customs unions are committed to removing all
barriers to the free flow of goods and services between each other, those in the former pursue
independent external trade policies while those in the latter commit to pursue a common
external trade policy.

Blooms: Understand
114. How is a common market different from an economic union?
A common market has no barriers to trade among member countries, includes a common
external trade policy, and allows factors of production to move freely among members. Labor
cross-border flows of capital among member countries. An economic union involves the free
flow of products and factors of production among member countries and the adoption of a
common external trade policy, but it also requires a common currency, harmonization of
members' tax rates, and a common monetary and fiscal policy.
9-80
Blooms: Understand
115. What are the two impediments to regional economic integration?
Despite the strong economic and political arguments in support, integration has never been
easy to achieve or sustain for two main reasons. First, although economic integration aids the
majority, it has its costs. While a nation as a whole may benefit significantly from a regional free
trade agreement, certain groups may lose. Moving to a free trade regime involves painful
adjustments. A second impediment to integration arises from concerns over national
sovereignty. Concerns about national sovereignty arise because close economic integration
demands that countries give up some degree of control over such key issues as monetary
policy, fiscal policy (e.g., tax policy), and trade policy.

Blooms: Remember
Difficulty: 1 Easy
116. Define trade creation and trade diversion with respect to regional economic integration.
by lower-cost external producers within the free trade area. Trade diversion occurs when lower-
cost external suppliers are replaced by higher-cost suppliers within the free trade area. A
regional free trade agreement will benefit the world only if the amount of trade it creates
exceeds the amount it diverts.

Blooms: Remember
Difficulty: 1 Easy
9-81
117. What are the two political factors that led to the creation of the European Union?
The European Union (EU) is the product of two political factors: (1) the devastation of Western
Europe during two world wars, and the desire for a lasting peace, and (2) the European nations'
desire to hold their own on the world's political and economic stage. In addition, many
Europeans were aware of the potential economic benefits of closer economic integration of the
countries.

Blooms: Remember
Difficulty: 1 Easy
9-82
118. Briefly describe the European Council.
controlling authority within the European Union (EU) because draft legislation from the
commission can become EU law only if the council agrees. The council is composed of one
representative from the government of each member-state. The membership, however, varies
depending on the topic being discussed. When agricultural issues are being discussed, the
agriculture ministers from each state attend council meetings; when transportation is being
discussed, transportation ministers attend, and so on. Before 1993, all council issues had to be
decided by unanimous agreement among member-states. This often led to marathon council
sessions and a failure to make progress or reach agreement on commission proposals. In an
attempt to clear the resulting logjams, the Single European Act formalized the use of majority
voting rules on issues "which have as their object the establishment and functioning of a single
market." Most other issues, however, such as tax regulations and immigration policy, still
require unanimity among council members if they are to become law. The votes that a country
gets in the council are related to the size of the country. For example, Britain, a large country,
has 29 votes, whereas Denmark, a much smaller state, has 7 votes.

Blooms: Understand
9-83
119. What were the objectives of the Single European Act?
The purpose of the Single European Act was to have one market in place by December 31,
1992. The act proposed the following changes:
• Remove all frontier controls among European Community (EC) countries, thereby abolishing
delays and reducing the resources required for complying with trade bureaucracy.
• Apply the principle of "mutual recognition" to product standards. A standard developed in
one EC country should be accepted in another, provided it meets basic requirements in such
matters as health and safety.
• Institute open public procurement to nonnational suppliers, reducing costs directly by
allowing lower-cost suppliers into national economies and indirectly by forcing national
suppliers to compete.
• Lift barriers to competition in the retail banking and insurance businesses, which should drive
down the costs of financial services, including borrowing, throughout the EC.
• Remove all restrictions on foreign exchange transactions between member countries by the
end of 1992.
• Abolish restrictions on cabotage—the right of foreign truckers to pick up and deliver goods
within another member-state's borders—by the end of 1992. Estimates suggested this would
reduce the cost of haulage within the EC by 10 to 15 percent.

Blooms: Remember
Difficulty: 1 Easy
9-84
120. Briefly describe the benefits of the euro.
Europeans decided to establish a single currency in the European Union (EU) for a number of
reasons. First, they believe that businesses and individuals realize significant savings from
having to handle one currency, rather than many. These savings come from lower foreign
exchange and hedging costs.
Second, and perhaps more importantly, the adoption of a common currency makes it easier to
compare prices across Europe. This has been increasing competition because it has become
easier for consumers to shop around.
Third, faced with lower prices, European producers have been forced to look for ways to reduce
their production costs to maintain their profit margins. The introduction of a common currency,
by increasing competition, has produced long-run gains in the economic efficiency of European
companies.
Fourth, the introduction of a common currency has given a boost to the development of a
highly liquid pan-European capital market. Over time, the development of such a capital market
should lower the cost of capital and lead to an increase in both the level of investment and the
efficiency with which investment funds are allocated. This could be especially helpful to smaller
companies that have historically had difficulty borrowing money from domestic banks.
Finally, the development of a pan-European, euro-denominated capital market increases the
range of investment options open to both individuals and institutions.

Blooms: Understand
9-85
121. Describe the drawbacks of the euro.
The drawback of the euro is that some national authorities have lost control over monetary
policy. Thus, it is crucial to ensure that the European Union's monetary policy is well managed.
The Maastricht Treaty called for establishment of the independent European Central Bank
(ECB), similar in some respects to the U.S. Federal Reserve, with a clear mandate to manage
monetary policy so as to ensure price stability. The ECB, based in Frankfurt, is meant to be
independent from political pressure—although critics question this. Among other things, the
ECB sets interest rates and determines monetary policy across the euro zone. According to
critics, another drawback of the euro is that the EU is not what economists would call an
optimal currency area. In an optimal currency area, 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. Many of the European economies in the euro zone,
however, are very dissimilar.

Blooms: Understand
9-86
122. Describe the arguments for the North American Free Trade Agreement (NAFTA).
Proponents of NAFTA have argued that the free trade area should be viewed as an opportunity
to create an enlarged and more efficient productive base for the entire region. Advocates
acknowledge that one effect of NAFTA would be that some U.S. and Canadian firms would
move production to Mexico to take advantage of lower labor costs. Movement of production to
Mexico, they argued, was most likely to occur in low-skilled, labor-intensive manufacturing
industries where Mexico might have a comparative advantage. Advocates of NAFTA argued
that many would benefit from such a trend. Mexico would benefit from much-needed inward
investment and employment. The United States and Canada would benefit because the
increased incomes of the Mexicans would allow them to import more U.S. and Canadian goods,
thereby increasing demand and making up for the jobs lost in industries that moved production
to Mexico. U.S. and Canadian consumers would benefit from the lower prices of products made
in Mexico. In addition, the international competitiveness of U.S. and Canadian firms that moved
production to Mexico to take advantage of lower labor costs would be enhanced, enabling
them to better compete with Asian and European rivals.

Blooms: Understand
9-87
123. Describe the Central American Common Market and the Central America Free Trade
Agreement.
Since then, the member countries have made some progress toward reviving their agreement
(the five founding members were joined by the Dominican Republic). The proposed common
market was given a boost in 2003 when the United States signaled its intention to enter into
bilateral free trade negotiations with the group. These culminated in a 2004 agreement to
establish a free trade agreement between the six countries and the United States. Known as the
Central America Free Trade Agreement, or CAFTA, the aim is to lower trade barriers between
the United States and the six countries for most goods and services.

Blooms: Remember
Difficulty: 1 Easy
9-88
124. Briefly describe the Association of Southeast Asian Nations.
Formed in 1967, the Association of Southeast Asian Nations (ASEAN) includes Brunei,
Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.
Laos, Myanmar, Vietnam, and Cambodia all joined in the 1990s, creating a regional grouping of
600 million people with a combined GDP of some $2 trillion. The basic objective of ASEAN is to
foster freer trade among member countries and to achieve cooperation in their industrial
policies. Progress so far has been limited, however.
Until recently, only 5 percent of intra-ASEAN trade consisted of goods whose tariffs had been
reduced through an ASEAN preferential trade arrangement. This may be changing. In 2003, an
ASEAN Free Trade Area (AFTA) between the six original members of ASEAN came into full
effect. The AFTA has cut tariffs on manufacturing and agricultural products to less than 5
percent. However, there are some significant exceptions to this tariff reduction.
Notwithstanding such issues, ASEAN and AFTA are at least progressing toward establishing a
free trade zone. Vietnam joined the AFTA in 2006, Laos and Myanmar in 2008, and Cambodia
in 2010. The goal was to reduce import tariffs among the six original members to zero by 2010
and to do so by 2015 for the newer members (although important exceptions to that goal, such
as tariffs on rice, will persist).
ASEAN also recently signed a free trade agreement with China that removes tariffs on 90
percent of traded goods. This went into effect on January 1, 2010. Trade between China and
ASEAN members more than tripled during the first decade of the twenty-first century, and this
agreement should spur further growth.

Blooms: Understand
9-89
125. Briefly describe how the creation of a single market through regional economic integration
offers significant opportunities. Provide an example.
The creation of a single market through regional economic integration offers significant
increasingly open. For example, in Europe before 1992 the large French and Italian markets
were among the most protected. These markets are now much more open to foreign
competition in the form of both exports and direct investment. Nonetheless, to fully exploit
such opportunities, it may pay non-European Union (EU) firms to set up EU subsidiaries. Many
major U.S. firms have long had subsidiaries in Europe. Those that do not would be advised to
consider establishing them now, lest they run the risk of being shut out of the EU by nontariff
barriers.
Additional opportunities arise from the inherent lower costs of doing business in a single
market—as opposed to 28 national markets in the case of the EU or 3 national markets in the
case of NAFTA. Free movement of goods across borders, harmonized product standards, and
simplified tax regimes make it possible for firms based in the EU and the NAFTA countries to
realize potentially significant cost economies by centralizing production in those EU and NAFTA
locations where the mix of factor costs and skills is optimal. Rather than producing a product in
each of the 28 EU countries or the 3 NAFTA countries, a firm may be able to serve the whole EU
or North American market from a single location. This location must be chosen carefully, of
course, with an eye on local factor costs and skills.

Blooms: Apply
Difficulty: 3 Hard
9-90

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Chapter 09 Test Bank

True / False Questions

By regional economic integration we mean agreements among countries in a geographic

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

An advantage of the euro is that the development of a pan-European, euro-denominated

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

A. regional economic integration.

Regional economic integration refers to agreements among countries in a geographic region to

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

A. free trade area.

AACSB: Analytical Thinking

A. free trade area.

AACSB: Analytical Thinking

A. free trade area

AACSB: Analytical Thinking

A. Factors of production are allowed to move freely between member nations.

AACSB: Analytical Thinking

AACSB: Analytical Thinking

A. The emphasis of EFTA has been on free trade in agricultural goods.

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

A. absence of a common external trade policy with regard to nonmembers

AACSB: Analytical Thinking

AACSB: Analytical Thinking

A. free trade area.

AACSB: Analytical Thinking

A. There are restrictions on immigration, emigration, or cross-border flow of capital among

AACSB: Analytical Thinking

AACSB: Analytical Thinking

A. free trade area.

AACSB: Analytical Thinking

AACSB: Analytical Thinking

A. Linking neighboring economies increases the potential for violent conflict.

AACSB: Analytical Thinking

AACSB: Analytical Thinking

A. labor activism and political ideologies

AACSB: Analytical Thinking