Question

After the formation of a free trade area for its member countries, the United States found that its high-cost furniture producers in North Carolina were replaced by low-cost producers from another country within the free trade area. This is an example of ________.

Answer 1

Answer: Trade creation

Explanation:

Trade creation is the increase in economic welfare which occurs when a country joins a free trade area, like the customs union. Trade creation will happen when the ltariff barriers has been reduced which leads to lower prices.

Trade creation leads to lower cost on producers which will lead to a rise in economic welfare and consumer surplus. Trade creation also leads to expansion of trade.