Suppose country X currently does not produce widgets. Instead, it imports widgets from country Z. Then country X establishes a preferential trading agreement with country Y. Following the formation of the PTA, it imports widgets from country Y. What has occurred?
a. There is trade diversion and a welfare loss for country X.
b. There is trade creation and a welfare loss for country Y.
c. There is trade diversion and a welfare gain for country X.
d. There is trade creation and a welfare gain for country Y.
Ans: a. There is trade diversion and a welfare loss for country X.
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?
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