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ch8

Student: ___________________________________________________________________________

1.

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 is known as regional economic integration. True False

2.

Countries can reduce trade barriers more rapidly by entering into regional agreements than they could by going through the WTO. True False

3.

The move toward regional economic integration has been most successful in Europe. True False

4.

In a customs union, trade barriers are eliminated among member countries, and each country maintains its own external trade polices with nonmember countries. True False

5.

The European Union is an example of a perfect economic union. True False

6.

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. True False

7.

A common market entails even closer economic integration and cooperation than an economic union. True False

8.

Regional economic integration can be seen as an attempt to achieve additional gains from the free flow of trade and investment between countries. True False

9.

It is easier to establish free trade among a limited number of adjacent countries than it is among the world community. True False

10. Linking neighboring countries economically and making them interdependent creates incentives to increase political cooperation as well. True False

11. Because of the fact that everyone benefits from economic integration, it is easy to achieve and sustain. True False

12. A major impediment to economic integration is the loss of sovereignty it entails. True False

13. In theory, WTO rules should ensure that a free trade agreement results in trade diversion. True False

14. When lower cost external suppliers are replaced by higher cost suppliers within a free trade area, there is trade creation. True False

15. A regional free trade agreement will benefit the world only when the amount of trade it diverts exceeds the amount of trade it creates. True False

16. There are two main trading blocs in Europe, the European Union and the European Free Trade Association. True False

17. The Treaty of Rome, signed in 1957, established the European Free Trade Association. True False

18. A central reason for the establishment of the EU was a strong desire on the part of member countries to hold their own on the world's political and economic stage. True False

19. The Council of the European Union is responsible for proposing EU legislation, implementing it, and monitoring compliance with EU laws by member states. True False

20. The ultimate controlling unit within the EU is the European Council. True False

21. The European Parliament is an elected body that debates legislation proposed by the European Commission. True False

22. The judges of the Court of Justice are required to act as representatives of national interests, rather than as independent officials. True False

23. The establishment of the euro required participating countries to give up their monetary policy. True False

24. The Single European Act committed EU countries to adopting a common currency by January 1, 1999. True False

25. Establishment of the euro created the largest currency zone in the world, replacing the position the U.S. dollar had held for decades. True False

26. Great Britain, Germany, and France have led the push toward a euro zone in the EU. True False

27. A key benefit resulting from the adoption of the euro is the ability to compare prices across member markets. True False

28. The Maastricht Treaty entails that the ECB take orders from politicians. True False

29. Since its establishment, the euro has had a stable trading history. True False

30. The governments of the Argentina and Brazil in 1988 agreed to enter into a free trade agreement, the goal of which was to eliminate all tariffs on bilateral trade between these countries by 1998. True False

31. 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. True False

32. The Andean Pact is a highly successful common market modeled after the EU. True False

33. The Free Trade Area of the Americas that was established in 2005 has thus far proven to be a success. True False

34. Until recently, only 5 percent of intra-ASEAN trade consisted of goods whose tariffs had been reduced through an ASEAN preferential trade arrangement. True False

35. The Asia-Pacific Economic Cooperation was established to increase multinational cooperation in view of the economic rise of the Pacific nations and the growing interdependence within the region. True False

36. To exploit the opportunities presented by the EU, non-EU firms must establish EU subsidiaries. True False

37. A benefit to companies of economic integration is the opportunity to centralize their production and reduce costs. True False

38. Once barriers to trade and investment are removed, companies can treat a group of integrated countries as a single market and produce standardized products for it. True False

39. In the EU, many firms have historically been limited by a low cost structure in their ability to compete globally with North American and Asian firms. True False

40. The emerging role of the European Commission in competition policy suggests the EU is increasingly willing and able to intervene and impose conditions on companies proposing mergers and acquisitions. True False

41. An agreement between countries in a geographic region to reduce tariff and nontariff barriers to the free flow of goods, services, and factors of production between each other is referred to as: A. B. C. D. regional economic integration. socioeconomic integration. political integration. economic-political integration.

42. The movement toward regional economic integration has been most successful in: A. B. C. D. Latin America. North America. Europe. Asia.

43. Identify the incorrect statement pertaining to the European Union. A. B. C. D. In 1993, it formally removed many barriers to doing business across borders within the EU. Its member states have launched a single currency, the euro. It was joined by two countries Switzerland and Norway, in 2007. It has expanded to 27 countries in 2007.

44. On January 1, 1993, _____ moved toward a single market with 340 million consumers. A. B. C. D. the European Union MERCOSUR the Andean community NAFTA

45. In 1991, Argentina, Brazil, Paraguay, and Uruguay implemented an agreement known as: A. B. C. D. NAFTA. MERCOSUR. APEC. FTAA.

46. These are the most popular form of regional economic integration, accounting for almost 90 percent of regional agreements. A. B. C. D. Free trade areas Customs unions Common markets Economic unions

47. Which of the following selections accurately depicts the levels of economic integration from least integrated to most integrated? A. B. C. D. Economic union, common market, customs union, free trade area, and full political union. Common market, economic union, full political union, free trade area, and customs union. Free trade area, customs union, common market, economic union, and full political union. Full political union, free trade area, common market, customs union, and economic union.

48. In a free trade area: A. B. C. D. barriers to the trade of goods and services among member nations are removed. a common currency is adopted. a single parliament determines political and foreign policy. a common external trade policy is adopted.

49. In a(n) _____, no discriminatory tariffs, quotas, subsidies, or administrative impediments are allowed to distort trade between member nations; however, each country is allowed to determine its own trade policies with regard to nonmembers. A. B. C. D. common market economic union political union free trade area

50. The most enduring free trade area in the world is the: A. B. C. D. Asia Pacific Economic Cooperation. MERCOSUR. European Free Trade Association. North American Free Trade Association.

51. Which of the following is true of a common market? A All barriers to the trade of goods and services among member countries are removed and each country . maintains its own policy toward nonmember countries. B It involves the free flow of products and factors of production between member countries and adoption of . individual external trade policies. C It has no barriers to trade between member countries, includes a common external trade policy, and . allows factors of production to move freely between members. D. It eliminates trade barriers between member countries and adopts a common external trade policy and a common currency. 52. Which of the following statements best defines a customs union? A All barriers to the trade of goods and services among member countries are removed and each country . maintains its own policy towards nonmember countries. B. It eliminates trade barriers between member countries and adopts a common external trade policy and a common currency. C It has no barriers to trade between member countries, includes a common external trade policy, and . allows factors of production to move freely between members. D. It eliminates trade barriers between member countries and adopts a common external trade policy. 53. The Andean Pact is an example of a(n): A. B. C. D. economic union. customs union. common market. political union.

54. Identify the incorrect statement about a common market. A. It has no barriers to trade between member countries B. It includes a common external trade policy C. It establishes a central political apparatus coordinating the economic, social, and foreign policy of the member states D. It allows factors of production to move freely between members 55. A(n) _____ involves the free flow of products and factors of production between member countries and the adoption of a common external trade policy, along with a common currency, harmonization of members' tax rates, and a common monetary and fiscal policy. A. B. C. D. free trade area economic union common market customs union

56. A political benefit of economic integration is that: A. it enables participants to achieve gains from the free flow of trade. B. it enables participants to achieve gains from the free flow of investment. C. it allow countries to specialize in the production of goods and services that they can produce most efficiently. D linking neighboring economies creates incentives for cooperation between the neighboring states and . reduces the potential for violent conflict.

57. All of the following are reasons why economic integration has never been easy to achieve or sustain except: A. B. C. D. even though it aids the majority, it has its costs. a nation as a whole may benefit significantly, but certain groups may lose. there are concerns over loss of national sovereignty. linking neighboring economies makes them increasingly dependent on each other.

58. _____ occurs when high-cost domestic producers are replaced by low-cost producers within the free trade area. A. B. C. D. A free trade zone Trade diversion Trade creation Trade interpretation

59. Trade diversion occurs when: A. B. C. D. low-cost producers within the free trade area replace high-cost domestic producers. lower-cost suppliers replace higher-cost external suppliers within the free trade area. higher-cost external suppliers replace lower-cost domestic producers within the free trade area. higher-cost suppliers replace lower-cost external suppliers within the free trade area.

60. The European Community was established by: A. B. C. D. the Treaty of Rome signed in 1957. the Maastricht Treaty signed in 1991. the Maastricht Treaty of 1994. the Single European Act of 1987.

61. The European Coal and Steel Community, formed in 1951, was a forerunner of: A. B. C. D. EFTA. EU. MERCOSUR. APEC.

62. Which of the following is not a main institution in the political structure of the EU? A. B. C. D. The European Parliament The European Central Bank The European Commission The Council of the European Union

63. The _____ is responsible for proposing EU legislation, implementing it, and monitoring compliance with EU laws by member states. A. B. C. D. European Parliament European Commission Council of the European Union Court of Justice

64. The _____ represents the interests of member states and is clearly the ultimate controlling authority within the EU. A. B. C. D. European Parliament European Commission European Council Court of Justice

65. Which of the following is directly elected by the populations of the member states and is primarily a consultative rather than legislative body? A. B. C. D. The European Parliament The European Commission The Council of the European Union The Court of Justice

66. Identify the incorrect statement pertaining to the EU's Court of Justice. A. B. C. D. It is comprised of one judge from each country. It is the supreme appeals court for EU law. Its judges are required to act as representatives of national interests. A member country can bring other members to the court for failing to meet EU treaty obligations.

67. The _____, adopted by the member nations of the European Community in 1987, committed member countries to work toward the establishment of a single market by December 31, 1992. A. B. C. D. Maastricht Treaty Treaty of Rome Single European Act Delores Commission

68. All of the following are true of the euro except: A. B. C. D. its notes and coins were first issued on January 1, 1999. it required participating countries to give up their own currencies. countries lost control of monetary policy when it was established. it created the second largest currency zone in the world.

69. In December 1991, EC members signed this treaty that committed them to adopting a common currency by January 1, 1999. A. B. C. D. The Treaty of Rome The Delores Commission The Maastricht Treaty The Single European Act

70. Which of the following is seen as a disadvantage of the euro? A. B. C. D. Higher foreign exchange and hedging costs. National authorities losing control over monetary policy. It becomes difficult to compare prices across Europe. Undermines the development of a pan-European capital market.

71. Bolivia, Peru, Ecuador, Columbia, and Venezuela are all members of: A. B. C. D. the EU. NAFTA. APEC. the Andean Pact.

72. MERCOSUR originated as a(n) _____ between Brazil and Argentina in 1988. A. B. C. D. open market free trade pact customs union free trade zone

73. According to Alexander Yeats: A. the trade diversion effects of MERCOSUR outweigh its trade creation effects. B. the fastest growing items in intra-MERCOSUR trade were capital-intensive goods produced efficiently in the member countries. C. MERCOSUR countries will be able to compete globally once the group's external trade barriers come down. D countries with more efficient manufacturing enterprises are getting a level playing field because of . MERCOSUR's reduction in trade barriers. 74. In early 2006, six CARICOM members and the United States established the _____, which was modeled on the EU's single market. A. B. C. D. Central American Common Market Central America Free Trade Agreement Caribbean Single Market and Economy North American Free Trade Area

75. All of the following are seen as stumbling blocks toward the establishment of the Free Trade Area of the Americas except: A. Brazil and Argentina want the United States to reduce its subsidies to U.S. agricultural producers. B. The United States wants its southern neighbors to agree to tougher enforcement of intellectual property rights. C. Brazil and Argentina want the United States to scrap tariffs on agricultural imports. D. The United States wants its southern neighbors to increase manufacturing tariffs. 76. Which of the following is not true of ASEAN? A. Cambodia, Laos, Myanmar, and Singapore are among its members. B. Its basic objective is to foster freer trade between member countries and to achieve cooperation in their industrial polices. C. It has been highly successful in achieving cooperation in its industrial policies. D. It is pushing for free trade agreements with China, Japan, and South Korea.

77. Which of the following is true of the Asia-Pacific Economic Cooperation (APEC)? A. B. C. D. It was founded in 2001 It currently has 57 member states United States and Japan are not members of this body Collectively, the member states account for much of the growth in the world economy

78. Collectively, the _____ member states account for about 55 percent of the world's GNP and 49 percent of world trade. A. B. C. D. APEC EU NAFTA MERCOSU

79. For international businesses, regional economic integration such as the EU: A. B. C. D. raises the costs of doing business in the region. eliminates differences in culture, allowing companies to standardize marketing activities. opens markets that had formerly been protected. standardizes competitive practices, enabling companies to realize substantial cost economies.

80. Which of the following is not a threat that emerges for international businesses as a result of regional economic integration? A. B. C. D. The business environment within each grouping becomes more competitive. There is a risk of being shut out of the single market by the creation of a "trade fortress." It limits the ability of firms to pursue the corporate strategy of their choice. The costs of doing business in a single market may fall.

81. Discuss the trend toward increased regional economic integration.

82. What are the five levels of economic integration? Briefly describe each form.

83. Which is the most enduring free trade area in the world? Briefly describe the same.

84. Compare and contrast a free trade area and a common market. Provide an example of each type of integration.

85. Discuss the economic case for economic integration. How does it relate to trade theory?

86. What is the political case for integration? How did political arguments influence the establishment of the European Union?

87. How easy is it for countries to integrate?

88. Some economists have expressed concerns that the benefits of regional integration have been touted while the costs have been ignored. Explain the view of these economists.

89. What prompted the formation of the European Union?

90. Briefly describe the four main institutions that make up the political structure of the EU.

91. What is the Single European Act? What was the effect of the Single European Act on the EU economy? Did the Single European Act achieve its goals?

92. Discuss the Maastricht Treaty. What did it accomplish?

93. How will EU countries benefit from the establishment of a single currency? What, if any, are the costs of a single currency?

94. Debate the ratification of the North American Free Trade Agreement. Do you support the agreement? Why or why not? In your opinion, should NAFTA be expanded?

95. Explain how MERCOSUR has changed over time. What are the implications of these changes?

96. Discuss the Free Trade Area of the Americas. What is hindering its progress? What is the position of the U.S. on the agreement? How does Brazil feel about the FTAA?

97. What is ASEAN? What is its basic goal? How successful is ASEAN?

98. Describe the state of economic integration in Africa. What factors have hindered the process?

99. Consider the opportunities arising from the creation of the EU for international businesses.

100.Describe the disadvantages of economic integration for international businesses. How can firms protect themselves from these threats?

ch8 Key
1.
(p. 266)

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 is known as regional economic integration. TRUE
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Easy Hill - Chapter 08 #1 Learning Objective: 08-1

2.
(p. 266)

Countries can reduce trade barriers more rapidly by entering into regional agreements than they could by going through the WTO. TRUE
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #2 Learning Objective: 08-1

3.
(p. 266)

The move toward regional economic integration has been most successful in Europe. TRUE
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Easy Hill - Chapter 08 #3 Learning Objective: 08-1

4.
(p. 268)

In a customs union, trade barriers are eliminated among member countries, and each country maintains its own external trade polices with nonmember countries. FALSE
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #4 Learning Objective: 08-1

5.
(p. 268)

The European Union is an example of a perfect economic union. FALSE


AACSB: Analytic Skills Blooms: Application Difficulty: Medium Hill - Chapter 08 #5 Learning Objective: 08-1

6.
(p. 268)

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. TRUE
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #6 Learning Objective: 08-1

7.
(p. 268)

A common market entails even closer economic integration and cooperation than an economic union. FALSE
AACSB: Domestic and Global Economic Environments Blooms: Comprehension Difficulty: Medium Hill - Chapter 08 #7 Learning Objective: 08-1

8.
(p. 269)

Regional economic integration can be seen as an attempt to achieve additional gains from the free flow of trade and investment between countries. TRUE
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #8 Learning Objective: 08-2

9.
(p. 269)

It is easier to establish free trade among a limited number of adjacent countries than it is among the world community. TRUE
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #9 Learning Objective: 08-2

10.
(p. 269)

Linking neighboring countries economically and making them interdependent creates incentives to increase political cooperation as well. TRUE
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #10 Learning Objective: 08-2

11.
(p. 270)

Because of the fact that everyone benefits from economic integration, it is easy to achieve and sustain. FALSE
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #11 Learning Objective: 08-2

12.
(p. 270)

A major impediment to economic integration is the loss of sovereignty it entails. TRUE


AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #12 Learning Objective: 08-2

13.
(p. 270)

In theory, WTO rules should ensure that a free trade agreement results in trade diversion. FALSE
AACSB: Domestic and Global Economic Environments Blooms: Comprehension Difficulty: Easy Hill - Chapter 08 #13 Learning Objective: 08-3

14.
(p. 270)

When lower cost external suppliers are replaced by higher cost suppliers within a free trade area, there is trade creation. FALSE
AACSB: Analytic Skills Blooms: Knowledge Difficulty: Easy Hill - Chapter 08 #14 Learning Objective: 08-3

15.
(p. 270)

A regional free trade agreement will benefit the world only when the amount of trade it diverts exceeds the amount of trade it creates. FALSE
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #15 Learning Objective: 08-3

16.
(p. 271)

There are two main trading blocs in Europe, the European Union and the European Free Trade Association. TRUE
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Easy Hill - Chapter 08 #16 Learning Objective: 08-4

17.
(p. 271)

The Treaty of Rome, signed in 1957, established the European Free Trade Association. FALSE
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #17 Learning Objective: 08-4

18.
(p. 271)

A central reason for the establishment of the EU was a strong desire on the part of member countries to hold their own on the world's political and economic stage. TRUE
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #18 Learning Objective: 08-4

19.
(p. 272)

The Council of the European Union is responsible for proposing EU legislation, implementing it, and monitoring compliance with EU laws by member states. FALSE
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #19 Learning Objective: 08-4

20.
(p. 273)

The ultimate controlling unit within the EU is the European Council. TRUE
AACSB: Analytic Skills Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #20 Learning Objective: 08-4

21.
(p. 273)

The European Parliament is an elected body that debates legislation proposed by the European Commission. TRUE
AACSB: Analytic Skills Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #21 Learning Objective: 08-4

22.
(p. 274)

The judges of the Court of Justice are required to act as representatives of national interests, rather than as independent officials. FALSE
AACSB: Reflective Thinking Skills Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #22 Learning Objective: 08-4

23.
(p. 277)

The establishment of the euro required participating countries to give up their monetary policy. TRUE
AACSB: Analytic Skills Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #23 Learning Objective: 08-4

24.
(p. 277)

The Single European Act committed EU countries to adopting a common currency by January 1, 1999. FALSE
AACSB: Ethical/Legal Responsibilities Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #24 Learning Objective: 08-4

25.
(p. 277)

Establishment of the euro created the largest currency zone in the world, replacing the position the U.S. dollar had held for decades. FALSE
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #25 Learning Objective: 08-4

26.
(p. 277)

Great Britain, Germany, and France have led the push toward a euro zone in the EU. FALSE
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #26 Learning Objective: 08-4

27.
(p. 277)

A key benefit resulting from the adoption of the euro is the ability to compare prices across member markets. TRUE
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #27 Learning Objective: 08-4

28.
(p. 278)

The Maastricht Treaty entails that the ECB take orders from politicians. FALSE
AACSB: Analytic Skills Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #28 Learning Objective: 08-4

29.
(p. 279)

Since its establishment, the euro has had a stable trading history. FALSE
AACSB: Analytic Skills Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #29 Learning Objective: 08-4

30.
(p. 280)

The governments of the Argentina and Brazil in 1988 agreed to enter into a free trade agreement, the goal of which was to eliminate all tariffs on bilateral trade between these countries by 1998. FALSE
AACSB: Reflective Thinking Skills Blooms: Comprehension Difficulty: Medium Hill - Chapter 08 #30 Learning Objective: 08-4

31.
(p. 282)

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. TRUE
AACSB: Reflective Thinking Skills Blooms: Comprehension Difficulty: Medium Hill - Chapter 08 #31 Learning Objective: 08-4

32.
(p. 283)

The Andean Pact is a highly successful common market modeled after the EU. FALSE
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #32 Learning Objective: 08-4

33.
(p. 285)

The Free Trade Area of the Americas that was established in 2005 has thus far proven to be a success. FALSE
AACSB: Analytic Skills Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #33 Learning Objective: 08-4

34.
(p. 286)

Until recently, only 5 percent of intra-ASEAN trade consisted of goods whose tariffs had been reduced through an ASEAN preferential trade arrangement. TRUE
AACSB: Reflective Thinking Skills Blooms: Comprehension Difficulty: Medium Hill - Chapter 08 #34 Learning Objective: 08-4

35.
(p. 287)

The Asia-Pacific Economic Cooperation was established to increase multinational cooperation in view of the economic rise of the Pacific nations and the growing interdependence within the region. TRUE
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #35 Learning Objective: 08-4

36.
(p. 289)

To exploit the opportunities presented by the EU, non-EU firms must establish EU subsidiaries. TRUE
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #36 Learning Objective: 08-5

37.
(p. 290)

A benefit to companies of economic integration is the opportunity to centralize their production and reduce costs. TRUE
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #37 Learning Objective: 08-5

38.
(p. 290)

Once barriers to trade and investment are removed, companies can treat a group of integrated countries as a single market and produce standardized products for it. FALSE
AACSB: Reflective Thinking Skills Blooms: Comprehension Difficulty: Medium Hill - Chapter 08 #38 Learning Objective: 08-5

39.
(p. 290)

In the EU, many firms have historically been limited by a low cost structure in their ability to compete globally with North American and Asian firms. FALSE
AACSB: Domestic and Global Economic Environments Blooms: Comprehension Difficulty: Medium Hill - Chapter 08 #39 Learning Objective: 08-5

40.
(p. 291)

The emerging role of the European Commission in competition policy suggests the EU is increasingly willing and able to intervene and impose conditions on companies proposing mergers and acquisitions. TRUE
AACSB: Reflective Thinking Skills Blooms: Comprehension Difficulty: Medium Hill - Chapter 08 #40 Learning Objective: 08-5

41.
(p. 266)

An agreement between countries in a geographic region to reduce tariff and nontariff barriers to the free flow of goods, services, and factors of production between each other is referred to as: A. B. C. D. regional economic integration. socioeconomic integration. political integration. economic-political integration.

While the move toward regional economic integration is generally seen as a good thing, some observers worry that it will lead to a world in which regional trade blocs compete against each other.
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Easy Hill - Chapter 08 #41 Learning Objective: 08-1

42.
(p. 266)

The movement toward regional economic integration has been most successful in: A. B. C. D. Latin America. North America. Europe. Asia.

Nowhere has the movement toward regional economic integration been more successful than in Europe. On January 1, 1993, the EU formally removed many barriers to doing business across borders within the EU in an attempt to create a single market with 340 million consumers.
AACSB: Analytic Skills Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #42 Learning Objective: 08-1

43.
(p. 266)

Identify the incorrect statement pertaining to the European Union. A. B. C. D. In 1993, it formally removed many barriers to doing business across borders within the EU. Its member states have launched a single currency, the euro. It was joined by two countries Switzerland and Norway, in 2007. It has expanded to 27 countries in 2007.

On May 1, 2004, the EU expanded from 15 to 25 countries and in 2007 two more countries joined, Bulgaria and Romania, making the total 27.
AACSB: Reflective Thinking Skills Blooms: Comprehension Difficulty: Medium Hill - Chapter 08 #43 Learning Objective: 08-1

44.
(p. 266)

On January 1, 1993, _____ moved toward a single market with 340 million consumers. A. B. C. D. the European Union MERCOSUR the Andean community NAFTA

On January 1, 1993, the European Union (EU) formally removed many barriers to doing business across borders within the EU in an attempt to create a single market with 340 million consumers.
AACSB: Analytic Skills Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #44 Learning Objective: 08-1

45.
(p. 266)

In 1991, Argentina, Brazil, Paraguay, and Uruguay implemented an agreement known as: A. B. C. D. NAFTA. MERCOSUR. APEC. FTAA.

In 1991, Argentina, Brazil, Paraguay, and Uruguay implemented an agreement known as MERCOSUR to start reducing barriers to trade between signatories, and although progress within MERCOSUR has been halting, the institution is still in place.
AACSB: Analytic Skills Blooms: Knowledge Difficulty: Easy Hill - Chapter 08 #45 Learning Objective: 08-1

46.
(p. 267)

These are the most popular form of regional economic integration, accounting for almost 90 percent of regional agreements. A. B. C. D. Free trade areas Customs unions Common markets Economic unions

In a free trade area, all barriers to the trade of goods and services among member countries are removed.
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #46 Learning Objective: 08-1

47.
(p. 267)

Which of the following selections accurately depicts the levels of economic integration from least integrated to most integrated? A. B. C. D. Economic union, common market, customs union, free trade area, and full political union. Common market, economic union, full political union, free trade area, and customs union. Free trade area, customs union, common market, economic union, and full political union. Full political union, free trade area, common market, customs union, and economic union.

Several levels of economic integration are possible in theory. From least integrated to most integrated, they are a free trade area, a customs union, a common market, an economic union, and, finally, a full political union.
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Hard Hill - Chapter 08 #47 Learning Objective: 08-1

48.
(p. 267)

In a free trade area: A. B. C. D. barriers to the trade of goods and services among member nations are removed. a common currency is adopted. a single parliament determines political and foreign policy. a common external trade policy is adopted.

In a free trade area, all barriers to the trade of goods and services among member countries are removed.
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #48 Learning Objective: 08-1

49.
(p. 267)

In a(n) _____, no discriminatory tariffs, quotas, subsidies, or administrative impediments are allowed to distort trade between member nations; however, each country is allowed to determine its own trade policies with regard to nonmembers. A. B. C. D. common market economic union political union free trade area

In a free trade area, all barriers to the trade of goods and services among member countries are removed.
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #49 Learning Objective: 08-1

50.
(p. 267)

The most enduring free trade area in the world is the: A. B. C. D. Asia Pacific Economic Cooperation. MERCOSUR. European Free Trade Association. North American Free Trade Association.

Established in January 1960, EFTA currently joins four countriesNorway, Iceland, Liechtenstein, and Switzerlanddown from seven in 1995.
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Easy Hill - Chapter 08 #50 Learning Objective: 08-1

51.
(p. 268)

Which of the following is true of a common market? A All barriers to the trade of goods and services among member countries are removed and each country . maintains its own policy toward nonmember countries. B.It involves the free flow of products and factors of production between member countries and adoption of individual external trade policies. C It has no barriers to trade between member countries, includes a common external trade policy, and . allows factors of production to move freely between members. D. It eliminates trade barriers between member countries and adopts a common external trade policy and a common currency. A customs union eliminates trade barriers between member countries and adopts a common external trade policy. An economic union requires a common currency, harmonization of members' tax rates, and a common monetary and fiscal policy.
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #51 Learning Objective: 08-1

52.
(p. 268)

Which of the following statements best defines a customs union? A All barriers to the trade of goods and services among member countries are removed and each country . maintains its own policy towards nonmember countries. B. It eliminates trade barriers between member countries and adopts a common external trade policy and a common currency. C It has no barriers to trade between member countries, includes a common external trade policy, and . allows factors of production to move freely between members. D. It eliminates trade barriers between member countries and adopts a common external trade policy. 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. An economic union requires a common currency, harmonization of members' tax rates, and a common monetary and fiscal policy.
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Hard Hill - Chapter 08 #52 Learning Objective: 08-1

53.
(p. 268)

The Andean Pact is an example of a(n): A. B. C. D. economic union. customs union. common market. political union.

A customs union eliminates trade barriers between member countries and adopts a common external trade policy. The Andean Community established free trade between member countries and imposes a common tariff of 5 to 20 percent on products imported from outside.
AACSB: Domestic and Global Economic Environments Blooms: Application Difficulty: Hard Hill - Chapter 08 #53 Learning Objective: 08-1

54.
(p. 268)

Identify the incorrect statement about a common market. A. It has no barriers to trade between member countries B. It includes a common external trade policy C. It establishes a central political apparatus coordinating the economic, social, and foreign policy of the member states D. It allows factors of production to move freely between members In a political union, a central political apparatus coordinates the economic, social, and foreign policy of the member states.
AACSB: Domestic and Global Economic Environments Blooms: Comprehension Difficulty: Medium Hill - Chapter 08 #54 Learning Objective: 08-1

55.
(p. 268)

A(n) _____ involves the free flow of products and factors of production between member countries and the adoption of a common external trade policy, along with a common currency, harmonization of members' tax rates, and a common monetary and fiscal policy. A. B. C. D. free trade area economic union common market customs union

An economic union entails even closer economic integration and cooperation than a common market.
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #55 Learning Objective: 08-1

56.
(p. 269)

A political benefit of economic integration is that: A. it enables participants to achieve gains from the free flow of trade. B. it enables participants to achieve gains from the free flow of investment. C. it allow countries to specialize in the production of goods and services that they can produce most efficiently. D linking neighboring economies creates incentives for cooperation between the neighboring states and . reduces the potential for violent conflict. Regional economic integration can be seen as an attempt to achieve additional gains from the free flow of trade and investment between countries. 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.
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #56 Learning Objective: 08-2

57.
(p. 269)

All of the following are reasons why economic integration has never been easy to achieve or sustain except: A. B. C. D. even though it aids the majority, it has its costs. a nation as a whole may benefit significantly, but certain groups may lose. there are concerns over loss of national sovereignty. linking neighboring economies makes them increasingly dependent on each other.

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.
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #57 Learning Objective: 08-2

58.
(p. 270)

_____ occurs when high-cost domestic producers are replaced by low-cost producers within the free trade area. A. B. C. D. A free trade zone Trade diversion Trade creation Trade interpretation

Trade creation may also occur when higher-cost external producers are replaced by lower-cost external producers within the free trade area.
AACSB: Analytic Skills Blooms: Knowledge Difficulty: Easy Hill - Chapter 08 #58 Learning Objective: 08-3

59.
(p. 270)

Trade diversion occurs when: A. B. C. D. low-cost producers within the free trade area replace high-cost domestic producers. lower-cost suppliers replace higher-cost external suppliers within the free trade area. higher-cost external suppliers replace lower-cost domestic producers within the free trade area. higher-cost suppliers replace lower-cost external suppliers within the free trade area.

Trade diversion occurs when lower-cost external suppliers are replaced by higher-cost suppliers within the free trade area.
AACSB: Analytic Skills Blooms: Knowledge Difficulty: Hard Hill - Chapter 08 #59 Learning Objective: 08-3

60.
(p. 271)

The European Community was established by: A. B. C. D. the Treaty of Rome signed in 1957. the Maastricht Treaty signed in 1991. the Maastricht Treaty of 1994. the Single European Act of 1987.

With the signing of the Treaty of Rome in 1957, the European Community was established.
AACSB: Analytic Skills Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #60 Learning Objective: 08-4

61.
(p. 271)

The European Coal and Steel Community, formed in 1951, was a forerunner of: A. B. C. D. EFTA. EU. MERCOSUR. APEC.

The forerunner of the EU, the European Coal and Steel Community, was formed in 1951 by Belgium, France, West Germany, Italy, Luxembourg, and the Netherlands.
AACSB: Analytic Skills Blooms: Knowledge Difficulty: Easy Hill - Chapter 08 #61 Learning Objective: 08-4

62.
(p. 278)

Which of the following is not a main institution in the political structure of the EU? A. B. C. D. The European Parliament The European Central Bank The European Commission The Council of the European Union

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.
AACSB: Analytic Skills Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #62 Learning Objective: 08-4

63.
(p. 272)

The _____ is responsible for proposing EU legislation, implementing it, and monitoring compliance with EU laws by member states. A. B. C. D. European Parliament European Commission Council of the European Union Court of Justice

Headquartered in Brussels, Belgium, the commission has more than 24,000 employees.
AACSB: Analytic Skills Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #63 Learning Objective: 08-4

64.
(p. 273)

The _____ represents the interests of member states and is clearly the ultimate controlling authority within the EU. A. B. C. D. European Parliament European Commission European Council Court of Justice

The European Council represents the interests of member states. It is clearly the ultimate controlling authority within the EU since draft legislation from the commission can become EU law only if the council agrees.
AACSB: Analytic Skills Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #64 Learning Objective: 08-4

65.
(p. 273)

Which of the following is directly elected by the populations of the member states and is primarily a consultative rather than legislative body? A. B. C. D. The European Parliament The European Commission The Council of the European Union The Court of Justice

The European Parliament debates legislation proposed by the commission and forwarded to it by the council.
AACSB: Analytic Skills Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #65 Learning Objective: 08-4

66.
(p. 274)

Identify the incorrect statement pertaining to the EU's Court of Justice. A. B. C. D. It is comprised of one judge from each country. It is the supreme appeals court for EU law. Its judges are required to act as representatives of national interests. A member country can bring other members to the court for failing to meet EU treaty obligations.

Like commissioners, the judges are required to act as independent officials, rather than as representatives of national interests.
AACSB: Reflective Thinking Skills Blooms: Comprehension Difficulty: Medium Hill - Chapter 08 #66 Learning Objective: 08-4

67.
(p. 274275)

The _____, adopted by the member nations of the European Community in 1987, committed member countries to work toward the establishment of a single market by December 31, 1992. A. B. C. D. Maastricht Treaty Treaty of Rome Single European Act Delores Commission

The Single European Act was independently ratified by the parliaments of each member country and became EC law in 1987.
AACSB: Ethical/Legal Responsibilities Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #67 Learning Objective: 08-4

68.
(p. 277)

All of the following are true of the euro except: A. B. C. D. its notes and coins were first issued on January 1, 1999. it required participating countries to give up their own currencies. countries lost control of monetary policy when it was established. it created the second largest currency zone in the world.

After January 1, 2002, euro notes and coins were issued and the national currencies were taken out of circulation.
AACSB: Reflective Thinking Skills Blooms: Comprehension Difficulty: Hard Hill - Chapter 08 #68 Learning Objective: 08-4

69.
(p. 277)

In December 1991, EC members signed this treaty that committed them to adopting a common currency by January 1, 1999. A. B. C. D. The Treaty of Rome The Delores Commission The Maastricht Treaty The Single European Act

In December 1991, EC members signed the Maastricht Treaty that committed them to adopting a common currency by January 1, 1999. 17 The euro is now used by 16 of the 27 member states of the European Union.
AACSB: Analytic Skills Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #69 Learning Objective: 08-4

70.
(p. 278)

Which of the following is seen as a disadvantage of the euro? A. B. C. D. Higher foreign exchange and hedging costs. National authorities losing control over monetary policy. It becomes difficult to compare prices across Europe. Undermines the development of a pan-European capital market.

Benefits of the euro: Businesses and individuals will realize significant savings that come from lower foreign exchange and hedging costs; the adoption of a common currency makes it easier to compare prices across Europe; the introduction of a common currency has given a boost to the development of a highly liquid pan-European capital market.
AACSB: Reflective Thinking Skills Blooms: Comprehension Difficulty: Medium Hill - Chapter 08 #70 Learning Objective: 08-4

71.
(p. 283)

Bolivia, Peru, Ecuador, Columbia, and Venezuela are all members of: A. B. C. D. the EU. NAFTA. APEC. the Andean Pact.

The Andean Pact was largely based on the EU model, but was far less successful at achieving its stated goals.
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Easy Hill - Chapter 08 #71 Learning Objective: 08-4

72.
(p. 284)

MERCOSUR originated as a(n) _____ between Brazil and Argentina in 1988. A. B. C. D. open market free trade pact customs union free trade zone

MERCOSUR, the South American grouping of Argentina, Brazil, Paraguay, and Uruguay (Venezuela has also applied to join), hopes to eventually establish itself as a common market.
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #72 Learning Objective: 08-4

73.
(p. 284)

According to Alexander Yeats: A. the trade diversion effects of MERCOSUR outweigh its trade creation effects. B. the fastest growing items in intra-MERCOSUR trade were capital-intensive goods produced efficiently in the member countries. C. MERCOSUR countries will be able to compete globally once the group's external trade barriers come down. D countries with more efficient manufacturing enterprises are getting a level playing field because of . MERCOSUR's reduction in trade barriers. According to Yeats, 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; MERCOSUR countries might not be able to compete globally once the group's external trade barriers come down; in the near term, countries with more efficient manufacturing enterprises lose because MERCOSUR's external trade barriers keep them out of the market.
AACSB: Domestic and Global Economic Environments Blooms: Comprehension Difficulty: Medium Hill - Chapter 08 #73 Learning Objective: 08-4

74.
(p. 285)

In early 2006, six CARICOM members and the United States established the _____, which was modeled on the EU's single market. A. B. C. D. Central American Common Market Central America Free Trade Agreement Caribbean Single Market and Economy North American Free Trade Area

The aim of CAFTA is to lower trade barriers between the United States and the six countries for most goods and services.
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #74 Learning Objective: 08-4

75.
(p. 285)

All of the following are seen as stumbling blocks toward the establishment of the Free Trade Area of the Americas except: A. Brazil and Argentina want the United States to reduce its subsidies to U.S. agricultural producers. B. The United States wants its southern neighbors to agree to tougher enforcement of intellectual property rights. C. Brazil and Argentina want the United States to scrap tariffs on agricultural imports. D. The United States wants its southern neighbors to increase manufacturing tariffs. The United States wants its southern neighbors to agree to tougher enforcement of intellectual property rights and lower manufacturing tariffs, which they do not seem to be eager to embrace.
AACSB: Domestic and Global Economic Environments Blooms: Comprehension Difficulty: Medium Hill - Chapter 08 #75 Learning Objective: 08-4

76.
(p. 286)

Which of the following is not true of ASEAN? A. Cambodia, Laos, Myanmar, and Singapore are among its members. B. Its basic objective is to foster freer trade between member countries and to achieve cooperation in their industrial polices. C. It has been highly successful in achieving cooperation in its industrial policies. D. It is pushing for free trade agreements with China, Japan, and South Korea. The basic objective of ASEAN is to foster freer trade between member countries and to achieve cooperation in their industrial policies. Progress so far has been limited, however.
AACSB: Domestic and Global Economic Environments Blooms: Comprehension Difficulty: Hard Hill - Chapter 08 #76 Learning Objective: 08-4

77.
(p. 286287)

Which of the following is true of the Asia-Pacific Economic Cooperation (APEC)? A. B. C. D. It was founded in 2001 It currently has 57 member states United States and Japan are not members of this body Collectively, the member states account for much of the growth in the world economy

Asia-Pacific Economic Cooperation (APEC) was founded in 1990. APEC currently has 21 member states including such economic powerhouses as the United States, Japan, and China.
AACSB: Domestic and Global Economic Environments Blooms: Comprehension Difficulty: Hard Hill - Chapter 08 #77 Learning Objective: 08-4

78.
(p. 287)

Collectively, the _____ member states account for about 55 percent of the world's GNP and 49 percent of world trade. A. B. C. D. APEC EU NAFTA MERCOSU

Collectively, the member states account for about 55 percent of the world's GNP, 49 percent of world trade, and much of the growth in the world economy.
AACSB: Analytic Skills Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #78 Learning Objective: 08-4

79.
(p. 289)

For international businesses, regional economic integration such as the EU: A. B. C. D. raises the costs of doing business in the region. eliminates differences in culture, allowing companies to standardize marketing activities. opens markets that had formerly been protected. standardizes competitive practices, enabling companies to realize substantial cost economies.

Opportunities arise from the inherent lower costs of doing business in a single market. Even after the removal of barriers to trade and investment, enduring differences in culture and competitive practices often limit the ability of companies to realize cost economies by centralizing production in key locations and producing a standardized product for a single multicountry market.
AACSB: Domestic and Global Economic Environments Blooms: Comprehension Difficulty: Medium Hill - Chapter 08 #79 Learning Objective: 08-5

80.
(p. 289)

Which of the following is not a threat that emerges for international businesses as a result of regional economic integration? A. B. C. D. The business environment within each grouping becomes more competitive. There is a risk of being shut out of the single market by the creation of a "trade fortress." It limits the ability of firms to pursue the corporate strategy of their choice. The costs of doing business in a single market may fall.

The creation of a single market through regional economic integration offers significant opportunities that arise from the inherent lower costs of doing business in a single market.
AACSB: Domestic and Global Economic Environments Blooms: Comprehension Difficulty: Medium Hill - Chapter 08 #80 Learning Objective: 08-5

81.
(p. 266)

Discuss the trend toward increased regional economic integration. In recent years, there has been a strong move toward regional economic integration, or agreements made by groups of countries in geographic regions to reduce, and ultimately remove, tariff and nontariff barriers to the free flow of goods, services, and factors of production between each other. By 2009, nearly all of the WTO's members had notified the organization of participation in one or more regional trade agreements. By entering into regional agreements, groups of countries are hoping to reduce trade barriers more rapidly than can be achieved under the auspices of the WTO.
AACSB: Domestic and Global Economic Environments Blooms: Comprehension Difficulty: Medium Hill - Chapter 08 #81 Learning Objective: 08-1

82.
(p. 267268)

What are the five levels of economic integration? Briefly describe each form. There are five levels of economic integration. From least integrated to most integrated, they 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. A customs union eliminates trade barriers between member countries and adopts a common external policy. A common market eliminates trade barriers between member countries and adopts a common policy toward nonmembers. In addition, factors of production are also allowed to move freely between member countries. Thus, labor and capital are free to move. An economic union eliminates trade barriers between member nations, adopts a common external policy, and permits factors of production to move freely between member countries. In addition, a full economic union requires a common currency, harmonization of the member countries' tax rates, and a common monetary and fiscal policy. 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.
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #82 Learning Objective: 08-1

83.
(p. 267268)

Which is the most enduring free trade area in the world? Briefly describe the same. The most enduring free trade area in the world is the European Free Trade Association (EFTA). Established in January 1960, EFTA currently joins four countriesNorway, Iceland, Liechtenstein, and Switzerlanddown from seven in 1995. EFTA was founded by those Western European countries that initially decided not to be part of the European Community. The emphasis of 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 EFTA.
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #83 Learning Objective: 08-1

84.
(p. 267268)

Compare and contrast a free trade area and a common market. Provide an example of each type of integration. All barriers to the trade of goods and services among member countries are removed in a free trade area, however, each country maintains the right to establish its own policies toward nonmembers. In contrast, a common market eliminates barriers to trade between member countries, but also includes a common external trade policy toward nonmembers. The factors of production are also allowed to move freely between member countries. In addition, in a common market, labor and capital are free to move because there are no restrictions on immigration, emigration, or cross-border flows of capital between member nations. The European Free Trade Area is an example of a free trade area. For years, the European Union functioned as a common market, although it has now moved beyond this stage.
AACSB: Domestic and Global Economic Environments Blooms: Application Difficulty: Easy Hill - Chapter 08 #84 Learning Objective: 08-1

85.
(p. 269)

Discuss the economic case for economic integration. How does it relate to trade theory? Economic theories of international trade predict that unrestricted free trade will allow countries to specialize in the production of goods and services so that they can produce most efficiently. Consequently, economic theory suggests that free trade and investment is a positive-sum game, in which all parties stand to gain. Regional economic integration is an attempt to achieve additional gains from the free flow of trade and investment between countries beyond those attainable under international agreements such as the WTO.
AACSB: Domestic and Global Economic Environments Blooms: Comprehension Difficulty: Medium Hill - Chapter 08 #85 Learning Objective: 08-2

86.
(p. 269)

What is the political case for integration? How did political arguments influence the establishment of the European Union? 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 violet conflict. Furthermore, by linking countries together, countries have greater clout and are politically much stronger in dealing with other nations. These considerations were instrumental in the establishment of the EU. Europe had suffered through two world wars in the first half of the century, and the desire for unity was high. In addition, many Europeans felt that after World War II the European nation-states were no longer large enough to hold their own in world markets and world politics. The need for a united Europe to deal with the U.S. on one side and the former Soviet Union on the other loomed large in the minds of the EC's founders.
AACSB: Reflective Thinking Skills Blooms: Comprehension Difficulty: Medium Hill - Chapter 08 #86 Learning Objective: 08-2

87.
(p. 270)

How easy is it for countries to integrate? Even with strong economic and political support for integration, there are two impediments that make integration difficult in many cases. First, although economic integration typically benefits the majority of the people in a country, certain groups may lose. These groups are likely to be at the forefront of efforts to stop economic integration. Second, the issue of national sovereignty becomes important. In many cases, these impediments to integration are very difficult to overcome.
AACSB: Reflective Thinking Skills Blooms: Comprehension Difficulty: Medium Hill - Chapter 08 #87 Learning Objective: 08-2

88.
(p. 270)

Some economists have expressed concerns that the benefits of regional integration have been touted while the costs have been ignored. Explain the view of these economists. While there is a general movement toward the establishment of regional free trade agreements, some economists have suggested that caution be used. According to these economists, the benefits of regional integration may have been oversold, while the costs have been ignored. They point out that the benefits of regional integration are determined by the extent of trade creation as opposed to trade diversion. 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 with 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.
AACSB: Domestic and Global Economic Environments Blooms: Comprehension Difficulty: Medium Hill - Chapter 08 #88 Learning Objective: 08-3

89.
(p. 271)

What prompted the formation of the European Union? The European Union is the product of two political factors. First, the devastation of Western Europe during two world wars and the desire for lasting peace prompted countries to join forces. Second, the union was formed out of a desire by European nations to hold their own on the world's political and economic stage. Furthermore, many Europeans were aware of the potential benefits that could arise from economic integration.
AACSB: Analytic Skills Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #89 Learning Objective: 08-4

90.
(p. 271274)

Briefly describe the four main institutions that make up the political structure of the EU. There are four main institutions that make up the political structure of the EU. The European Commission is responsible for proposing EU legislation, implementing it, and monitoring compliance with EU laws. The European Council represents the interests of member states. The European Parliament acts a consultative body and debates legislation proposed by the commission and forwarded to it by the council. Finally, the Court of Justice is the supreme appeals court for EU law.
AACSB: Analytic Skills Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #90 Learning Objective: 08-4

91.
(p. 274275)

What is the Single European Act? What was the effect of the Single European Act on the EU economy? Did the Single European Act achieve its goals? The Single European Act, which was adopted in 1987, committed member countries to work toward the establishment of a single market by December 31, 1992. The act proposed that all frontier controls between EC countries be removed, that the principle of mutual recognition be applied to product standards, that lower-cost suppliers be permitted into national economies, that barriers to competition be lifted in the retail banking and insurance businesses, that all restriction on foreign exchange transactions between member countries be removed, and that restrictions on cabotage be abolished. To signify the importance of the Act, the European Community also decided to change its name to the European Union. The Single European Act had a significant effect on the EU economy as it provided the impetus for restructuring substantial sections of European industry. Faster economic growth is a result.
AACSB: Ethical/Legal Responsibilities Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #91 Learning Objective: 08-4

92.
(p. 277)

Discuss the Maastricht Treaty. What did it accomplish? The Maastricht Treaty, signed in 1991 by EC members, committed signatories to adopting a common currency, the euro, by 1999. The establishment of the euro created the second largest currency zone in the world, second only to the U.S. dollar. While the 12 participating countries locked their exchange rates against each other in 1999, euro notes and coins were not actually issued until 2002. By mid-2002, all prices and routine economic transactions within the euro zone were in euros.
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #92 Learning Objective: 08-4

93.
(p. 277278)

How will EU countries benefit from the establishment of a single currency? What, if any, are the costs of a single currency? There were several reasons that promoted the establishment of the euro. First is the belief that businesses and individuals will realize significant savings from having to handle one currency rather than many. Second, the adoption of a common currency will make it easier to compare prices across Europe. Third, faced with lower prices, European producers will be forced to look for ways to reduce their production costs to maintain their profit margins. Fourth, the euro should give a strong boost to the development of a highly liquid pan-European capital market. Finally, the range of investment options open to both individuals and institutions will increase. However, in establishing a common currency, nations have had to give up control over monetary policy. Another drawback of the euro is that the EU is not what economists would call an optimal currency area, or an area in which similarities in the underlying structure of economic activity make it feasible to adopt a single currency.
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #93 Learning Objective: 08-4

94.
(p. 280283)

Debate the ratification of the North American Free Trade Agreement. Do you support the agreement? Why or why not? In your opinion, should NAFTA be expanded? NAFTA is a free trade agreement between the United States, Canada, and Mexico. When the agreement was initially proposed in 1988, there was much debate as to whether the agreement should be ratified. Proponents of NAFTA argued that NAFTA should be seen as an opportunity to create an enlarged and more efficient productive base for the entire North American region. They argued that while some lower-income jobs would move from the United States and Canada to Mexico, new jobs would be created in the U.S. and Canada as economic growth occurred in Mexico as a result of the job transfers. In addition, the international competitiveness of U.S. and Canadian firms that move production to Mexico to take advantage of lower labor costs will be enhanced, enabling them to better compete against Asian and European rivals. Those that opposed NAFTA claimed that U.S. and Canadian citizens would lose their jobs in alarming numbers as low-income positions were moved to Mexico to take advantage of lower wage rates. Environmentalists also voiced concerns about NAFTA. Because Mexico has more lenient environmental protection laws than either the U.S. or Canada, there was concern that U.S. and Canadian firms would relocate to Mexico to avoid the cost of protecting the environment. Finally, there was opposition in Mexico to NAFTA from those who feared a loss of national sovereignty. Mexican critics feared that NAFTA would allow their country to be dominated by U.S. and Canadian multinationals, and Mexico would be used as a low-cost assembly site, while keeping their higher-paying jobs in their own countries.
AACSB: Domestic and Global Economic Environments Blooms: Comprehension Difficulty: Medium Hill - Chapter 08 #94 Learning Objective: 08-4

95.
(p. 284285)

Explain how MERCOSUR has changed over time. What are the implications of these changes? MERCOSUR originated in 1988 as a free trade pact between Brazil and Argentina. Initially, the reductions in trade barriers resulting from the agreement led to an 80 percent increase in trade between the two countries. Encouraged by this early success, the pact was expanded to include Paraguay and Uruguay. The initial objective was to establish a free trade area and move toward a full customs union. According to critics, the effects of MERCOSUR outweigh its trade creation effects. MERCOSUR hit a significant roadblock in 1998, when its member states slipped into recession and intrabloc trade slumped. Trade fell further in 1999 following a financial crisis in Brazil that led to the devaluation of the Brazilian real. As of 2009, however, little progress had been made in moving MERCOSUR toward its goals. Critics feel that the customs union, if anything, is becoming more imperfect over time.
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Hard Hill - Chapter 08 #95 Learning Objective: 08-4

96.
(p. 285286)

Discuss the Free Trade Area of the Americas. What is hindering its progress? What is the position of the U.S. on the agreement? How does Brazil feel about the FTAA? The Free Trade Area of the Americas (FTAA) was proposed in 1994. After several years, a goal was established to form the FTAA by 2005, a goal that was not met. Support for the movement has waned, and the future of the proposed free trade area is in question. Two of the original advocates, the U.S. and Brazil, are sending mixed signals about the agreement. The U.S. wants the southern countries to commit to tougher enforcement of intellectual property rights and lower manufacturing tariffs, requests that have so far fallen on deaf ears. Similarly, Argentina and Brazil want the U.S. to reduce agricultural subsidies and put an end to tariffs on agricultural products. The U.S. has thus far ignored these requests. If countries can overcome these obstacles, the proposed market would involve more than 850 million people.
AACSB: Domestic and Global Economic Environments Blooms: Comprehension Difficulty: Medium Hill - Chapter 08 #96 Learning Objective: 08-4

97.
(p. 286)

What is ASEAN? What is its basic goal? How successful is ASEAN? The Association of Southeast Asian Nations (ASEAN) was formed in 1967. The grouping, which includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam, creates a regional grouping of 500 million people. The basic goal of ASEAN is to foster freer trade between member countries and to achieve cooperation in their industrial policies. To date, however, progress has been limited. The ASEAN Free Trade Area came into effect in 2003 between the original six members of ASEAN and has been successful at cutting tariffs on manufacturing and agricultural products to less than 5 percent.
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #97 Learning Objective: 08-4

98.
(p. 288289)

Describe the state of economic integration in Africa. What factors have hindered the process? There have been efforts to establish trading bloc in Africa for half a century, however, meaningful progress has been slow. Political turmoil in several nations has hindered the process as has the suspicion that free trade will result in unfair foreign competition. The most recent effort at integration came in 2001 when Kenya, Uganda, and Tanzania attempted to establish a customs union, regional court, legislative assembly, and, eventually, a political federation.
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 08 #98 Learning Objective: 08-4

99.
(p. 289)

Consider the opportunities arising from the creation of the EU for international businesses. The creation of a single market through regional economic integration presents significant opportunities to companies. Countries within the EU, such as Italy and France, are now much more open to foreign competition. Companies should also see their costs drop as they do business in a single, large market as opposed to 27 national markets in the case of the EU or three national markets in the case of NAFTA. Production can be centralized in the EU location where the mix of factor costs and skills is optimal.
AACSB: Domestic and Global Economic Environments Blooms: Comprehension Difficulty: Medium Hill - Chapter 08 #99 Learning Objective: 08-5

100.
(p. 290291)

Describe the disadvantages of economic integration for international businesses. How can firms protect themselves from these threats? Economic integration presents a number of difficulties for companies. Certainly, the more competitive business environment that will result from integration would be considered a disadvantage. To survive, firms will have to capitalize on the opportunities presented by the creation of an integrated marketplace and rationalize their production and reduce their costs. Companies that are outside of trading areas such as the EU may find themselves facing a trade fortress with high barriers to imports and investment. Consequently, firms may find that to protect themselves, they will need to establish operations "on the inside." Finally, firms may find their strategic choice limited by restrictions on proposed acquisitions and mergers. Firms may find that they must make significant concessions in order for their proposed plans to move ahead.
AACSB: Domestic and Global Economic Environments Blooms: Comprehension Difficulty: Medium Hill - Chapter 08 #100 Learning Objective: 08-5

ch8 Summary
Category AACSB: Analytic Skills AACSB: Domestic and Global Economic Environments AACSB: Ethical/Legal Responsibilities AACSB: Reflective Thinking Skills Blooms: Application Blooms: Comprehension Blooms: Knowledge Difficulty: Easy Difficulty: Hard Difficulty: Medium Hill - Chapter 08 Learning Objective: 08-1 Learning Objective: 08-2 Learning Objective: 08-3 Learning Objective: 08-4 Learning Objective: 08-5 # of Questions 23 62 3 12 3 28 69 12 8 80 100 26 10 6 49 9