CFA Practice Question

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CFA Practice Question

After the UK joined the EU, some UK households switched their spending on car and home insurance away from a higher-priced UK supplier towards a French insurance company operating in the UK market. This is an example of trade ______

A. creation
B. liberalization
C. diversion
Correct Answer: A

Trade creation should stimulate an increase in intra-EU trade within the customs union and should, in theory, lead to an improvement in the efficient allocation of scarce resources and gains in consumer and producer welfare.

User Contributed Comments 4

User Comment
ankurwa10 Can someone please explain as to why it's not trade diversion?
Kevdharr It isn't trade diversion because the UK supplier is higher priced (i.e. less efficient). Trade diversion would occur if the UK supplier was a more efficient one, but a trade agreement FORCED UK households to switch to a different supplier within the agreement. So they were being diverted away from a more efficient option due to a trade agreement. But in this case, they are being diverted away from a LESS efficient option. So it is trade CREATION because the trade agreement is providing them with easier access to a more efficient supplier.
khalifa92 trade creation replacing domestic with members products
trade diversion replacing non-membets products with members products.
Freddie33 And now the opposite is happening with Brexit. Nice one UK
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