Using a numerical example, discuss how free trade agreements can lead to trade creation and trade diversion.

Case Study: American Airlines Action Raise Predatory Pricing Concerns
1. What routes are at issue in the case? Who was the competition in each case? How did American react?
2. When American matches the fares of a low-cost carrier, what competitive advantages does it have over those airlines?
3. What are the barriers to entry for airlines to compete with American on routes from DFW?
4. What is FAUDNC, and how is it used by American Airlines? What other cost/profitability measures are used?
5. How does American’s reputation for challenging low-cost carriers factor into decisions made by competing airlines? Has American’s reputation deterred entry by low-cost carriers on DFW routes?
In the context of the changing demographics of the global economy, which of the following has seen a decline?
Economic development and industrialization of the developing nations?
The US share of world exports of goods and services?
Economic opportunities in the developing nations of the world?
Deregulation of the markets in the ventrally planned economics of the communist world?
Explain.
The Effect of Policies In 2003, Congress enacted substantial increases in defense spending to counter terrorism and significant reductions in taxes. 1. According to the Keynesian cross, what were the short-run effects on the planned expenditure curve and the equilibrium level of GDP? 2. What were the effects on the IS and/or LM curves?
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