Question

Country A and Country B entered into a free trade agreement recently. After this, Country A starts importing heavy machinery from Country B. Country A used to previously import such machinery at lower rates from another country. Which of the following has occurred in this scenario?

Answer 1

Answer:

Trade Diversion.

Explanation:

There has been an agreement between Country A and Country B. Now Country A imports heavy machinery from Country B at high rates previously Country A used to import these kind of machines from another country with lower rates.So it is a trade diversion.

A trade diversion occurs when a supplier supplying goods at lower rates is replaced by a supplier supplying goods at higher rates that is within the free trade.