CEA International Trade and Finance 5

Question 1

The 'gravity model' of international trade predicts that bilateral trade flows are:

Accepted Answer

Directly related to both country GDPs and inversely related to distance

Answer

The gravity model shows that trade between two countries increases with their economic sizes (GDPs) and decreases with the distance between them, analogous to Newton's law of gravity.

Question 2

Trade diversion, a potential cost of a preferential trade agreement, occurs when:

Accepted Answer

Import sourcing shifts from an efficient non-member to a less efficient member due to tariff preferences

Answer

Trade diversion reduces welfare by shifting purchases from the lowest-cost global producer to a higher-cost partner that benefits from preferential tariff treatment.

Question 3

A country's terms of trade improve when:

Accepted Answer

The price of its exports rises relative to its imports

Answer

Terms of trade equal export prices divided by import prices; an increase means the country can buy more imports per unit of exports, improving welfare.

Question 4

The WTO's Most Favored Nation (MFN) principle requires that:

Accepted Answer

Any trade advantage granted to one member must be extended to all WTO members

Answer

MFN is the cornerstone of the WTO system, requiring non-discrimination: a tariff concession offered to any one WTO member must be applied equally to all members.

Question 5

Foreign exchange reserves held by a central bank primarily serve to:

Accepted Answer

Intervene in currency markets and service external debt obligations

Answer

Foreign reserves allow central banks to defend the exchange rate through market intervention and provide liquidity to meet external debt obligations during stress.

(CEA) Certified Economic Analyst Practice Test

(CEA) Certified Economic Analyst Practice Test

CEA International Trade and Finance 5