4.1.5 Trading blocs and the World Trade Organisation Quiz: Pearson Edexcel Economics A, Unit 4

The 20 questions

1. In a free trade area, what happens to trade barriers between member countries and to external tariffs?

   • Tariffs between members are raised to protect each partner's domestic producers from one another
   • Members adopt a common external tariff, but internal tariffs between members are kept in place
   • Tariffs are removed on all imports from every country, including members and non-members alike
   • Tariffs between members are removed, but each member keeps its own separate tariffs on imports from non-members

2. What distinguishes a customs union from a free trade area?

   • A customs union applies a common external tariff to non-members, as well as removing internal tariffs
   • A customs union uses a single currency, which a free trade area does not use for trade settlement
   • A customs union has no internal tariffs, but each member sets its own tariffs on goods from non-members
   • A customs union allows free movement of labour and capital, which a free trade area does not permit

3. Which feature defines a common market, beyond a customs union?

   • Trade barriers placed only on imports from non-members, with members trading freely among themselves
   • A single currency shared by all members and a common central bank that sets interest rates
   • Free movement of goods, services, labour and capital between member countries
   • Free movement of goods only, with tariffs on services and labour still applied between members

4. Which best describes a monetary union?

   • A group of countries sharing a single currency and a common monetary policy, usually run by a central bank
   • A group of countries that agree to share a common flag and national anthem, but not economic policy
   • A group of countries that agree to fix tariffs on imports from non-members at a common level
   • A group of countries that agree only to remove tariffs on goods, while each keeps its own currency

5. Which set of conditions is most important for a monetary union such as the Eurozone to succeed?

   • Each member running a large and permanent fiscal deficit, to keep demand high in all member economies
   • Each member having a separate currency, with independent exchange rates set by each national central bank
   • High labour mobility, flexible wages and prices, fiscal transfers between members, and similar business cycles
   • High trade barriers with non-members, to protect members from competition from low-cost external producers

6. A member of the Eurozone faces a deep recession with high unemployment. Why is this difficult to correct?

   • It cannot use fiscal policy at all, because all Eurozone members must balance their budgets every year
   • It can devalue its currency at will, but this always raises unemployment because import prices rise sharply
   • It can set its own interest rates freely, but this always increases inflation and makes the recession worse
   • It cannot devalue its currency or set its own interest rates to stimulate demand, so it relies on fiscal or wage adjustment

7. Which is a benefit of a regional trade agreement for its members?

   • Higher average tariffs on all trade with non-members, which guarantees that members' domestic producers earn profits
   • Complete loss of sovereignty over trade policy, which always reduces the cost of administering trade rules
   • A certain fall in the total volume of trade between members, as protection reduces the need for imports
   • Larger markets and greater trade creation can allow economies of scale and more competition among members

8. Which is a cost of a regional trade agreement for its members or for non-members?

   • Trade diversion, where trade shifts from lower-cost non-members to higher-cost members, lowering efficiency
   • A fall in trade between members, because each member must buy only from non-members under the agreement
   • Lower prices for consumers in every member, because common tariffs always reduce the cost of all imports
   • Automatic gains in productivity for non-members, since they lose no trade and receive free access to the region

9. What is the main role of the World Trade Organisation (WTO)?

   • To provide loans to member countries that run a balance of payments deficit with other members
   • To issue a single global currency that all member countries must use for trade settlement
   • To promote trade liberalisation through negotiation rounds, enforce trade rules and settle disputes between members
   • To set and collect tariffs on all goods traded between its member countries on behalf of governments

10. What does the most-favoured-nation (MFN) principle in WTO rules require?

    • Any trade concession given to one member must be extended to all other WTO members
    • Each member must give the highest tariff rate to the country that is its largest trading partner
    • Members must impose the same tariff on imports from every country, including those that are not WTO members
    • Members must restrict imports from all countries that are not part of a regional trade agreement

11. A customs union applies a common external tariff of 15 per cent on imports from non-members. A non-member good sells for £80 before tariff. What is its price at the union's border?

    • £80, since tariffs are paid only by the importer and not included in the border price
    • £92, since 80 x 1.15 = 92
    • £12, since the tariff alone is 15 per cent of 80 and that is the full border price
    • £65, since 80 less 15 gives the price after the tariff is removed

12. A free trade area lets goods enter through the member with the lowest external tariff and then move freely to the highest-tariff member. What problem does this cause and how is it addressed?

    • Trade deflection, which rules of origin address by requiring goods to be made or substantially transformed within the area
    • Excess labour supply, which rules of origin address by setting minimum wages for all workers in the free trade area
    • Trade creation, which rules of origin remove by banning all imports of goods from the member with the lowest tariff
    • Monetary instability, which rules of origin address by fixing exchange rates between all the member currencies

13. Which is the most accurate evaluation of whether a regional trade agreement raises welfare?

    • It never raises welfare, because any preferential treatment always reduces consumption in every member country
    • It always raises welfare, because all trade within the agreement is by definition more efficient than trade outside
    • It depends on whether trade creation outweighs trade diversion, since diversion can reduce global efficiency
    • It has no effect on welfare, because trade within the bloc is perfectly offset by trade with non-members

14. Why might a monetary union cause difficulties for members with persistently higher inflation than the rest of the union?

    • Their real exchange rate depreciates each year, which automatically raises their competitiveness in all markets
    • Their inflation has no effect on competitiveness, because all prices are fixed by the union's central bank each year
    • Their real exchange rate appreciates over time, which erodes their competitiveness and worsens their trade position
    • Their inflation falls automatically whenever they join a monetary union, which removes the need for any policy

15. Which factor would most reduce the costs of a currency union for a member facing shocks that differ from the rest of the union?

    • Permanent trade barriers against other members, which protect the member from shocks originating elsewhere
    • A separate currency for that member, so that its exchange rate can move independently of the rest of the union
    • Low labour mobility and a rigid budget rule that prevents any fiscal transfer to the member from other members
    • High labour mobility and large fiscal transfers that can help the member adjust to asymmetric shocks

16. Which best describes a bilateral trade agreement?

    • An agreement between two countries to reduce trade barriers on goods and services traded between them
    • An agreement between a country and the WTO to exempt its exports from all tariffs in every market
    • An agreement between two countries to fix their exchange rate permanently against a third currency
    • An agreement between all members of a region to adopt a common external tariff on imports from non-members

17. Which role of the WTO helps smaller economies challenge larger trading partners?

    • The WTO gives smaller economies an exemption from all trade rules, so they can protect their domestic industries
    • The WTO requires larger economies to pay compensation to smaller economies for every trade agreement they sign
    • The dispute settlement process allows members to bring cases over alleged breaches of agreed trade rules
    • The WTO automatically imposes tariffs on any member that trades with a larger economy than its own

18. Among free trade areas, customs unions, common markets and monetary unions, which is the most integrated?

    • A monetary union, which adds a single currency and common monetary policy to a common market
    • A common market, which allows free movement of goods but excludes any sharing of monetary policy
    • A customs union, which only removes internal tariffs and so is more integrated than a common market
    • A free trade area, which removes all barriers to trade and so is the deepest form of integration

19. A member of a common market wants to hire workers from another member state. Which freedom is involved?

    • Free movement of labour between member states
    • Free movement of goods across the external border of the bloc, with tariffs applied to imported workers
    • A fixed exchange rate for workers' wages set by the central bank of the bloc each year
    • A common external tariff on services supplied by workers from non-member states in the bloc

20. What is the main downside of a customs union for a member that imports much from outside the union?

    • It must use a separate currency for each import, which raises the cost of trade with every non-member
    • It must accept the common external tariff, which may raise the price of imports from its usual non-member suppliers
    • It must produce all goods domestically, since a customs union bans all imports from outside the union
    • It must remove all tariffs on goods from non-members, which lowers the revenue it receives from its trade

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