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International Trade and the European Common Market

1. Country A and Country B create a free-trade area. Before the creation of the free-trade area, Country A imported 1 million TVs from the world market at a cost of $500 per TV and added a tariff of $30 per TV. It costs $110 to produce a similar TV in Country B.
a. Once the free-trade area is established, what will be the cost to Country A of the TVs diverted from Country B?
b. How much extra imports would have to be generated in Country A to offset the trade-diversion cost of the free-trade area?

2. European Common Market
a. Who was involved in the early efforts to create the European Common Market (ECC) and what were some of the early measures taken by the ECC?
b. How did the adoption of the euro in the ECC come about?

a. What are the specific advantages of CEMEX that has allowed it to succeed internationally?
b. What did CEMEX do to use its advantages to improve its position internationally?

4. Japan has a very low rate of immigration because of very restrictive government policies. What arguments could you make to convince the Japanese government that those policies restrict the economic growth of Japan?

Pugel, T.A. (2009). International economics (14th ed.). New York, NY: McGraw-Hill.

Solution Preview

1. Free Trade Area

a. With the establishment of free trade area, country A cannot charge tariff on TVs imported from country B. Hence, it has to pay $500 per TV.

As the trade between the two countries gets open, there will be no tariffs. A free trade area is a bloc or geographical area consisting of countries that allow free trade inside their boundaries. The member countries sign a free trade agreement or FTA. This agreement eliminates tariffs, import duties and preferences on goods and services produced in member countries. This is considered as an open border which is a part of economic integration. The economic structure forms the basis for incentives. If the countries are economically competitive, then there are no or selective incentives for those countries.

b. The number of imports allowed to offset trade diversion cost is 500/30= 167 units. This is the number of units which should be imported to offset the cost of trade diversion due to free trade.

2. European Common Market

a. European Common Market and its efforts

Formation of European Common Market or ECC was the result of Schuman Plan where six countries set up the European Coal and Steel Community in 1950s. These were Belgium, France, West Germany, Italy, Netherlands and Luxembourg. This was the earlier phase of European integration. These ...

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