Final answer:
The correct answer to the question is option C. falls; loss of tariff revenue for the importing nation; gain in the exporting nation's producer surplus. This scenario illustrates how trade diversion within trade agreements can negatively affect combined welfare if the losses from inefficiency and lost tariff revenue outweigh the gains. The broader effects of international trade on a nation's welfare vary across different sectors.
Step-by-step explanation:
The student asked, "Trade diversion may be such that the combined welfare of two nations in the agreement actually______because of_________, not completely offset by the__________." The correct answer to fill in the blanks is: C. falls; loss of tariff revenue for the importing nation; gain in the exporting nation's producer surplus. This outcome can occur when countries form a trade agreement, resulting in trade being diverted from a more efficient exporter outside the agreement to a less efficient one within the agreement. While the importing nation loses tariff revenue, the exporting nation within the agreement experiences a gain in producer surplus. The net effect might be negative if the loss due to inefficiency and loss of tariff exceeds the gains.
International trade generally results in some sectors benefiting and others suffering negative impacts. For example, workers in industries facing competition from imports may experience a decrease in labor demand, leading to lower wages. On the other hand, sectors that export to global markets may see increased demand for their labor, raising wages. The overall effect of international trade on the welfare of a nation thus depends on these varying impacts on different sectors.
Considering trade's income distribution effects, we can analyze the scenario of increased trade between Germany and the Czech Republic. In this case, Germany's paint industry and the Czech Republic's alarm clock industry may see jobs and wages increase as a result of the trade agreement. Conversely, the German alarm clock industry and the Czech paint industry might experience a decrease. To ensure no increase in total unemployment, both countries would need to ensure that the workforce is able to transition to the expanding industries or find employment opportunities in new or growing sectors.