Trading Blocs

Question 1

Free Trade Areas

Answer 1

• elimination of import tariffs and quotas on trade between member countries
• Goods and services can move freely within the bloc without customs duties.
• E.g. NAFTA

Question 2

Customs Unions

Answer 2

• Removal of trade barriers with a common external tariff on imports from non-member countries
• member countries ordinate their trade policies
• E.g. EU

Question 3

Common Market

Answer 3

• Removal of trade barriers, common external tariff, free movement of factors of production
• E.g. The EU before the establishment of the eurozone

Question 4

Monetary Union

Answer 4

• Common currency shared by member countries
• E.g. Eurozone

Question 5

Role of the WTO

Answer 5

• Negotiation
• Dispute settlement
• Monitoring
• Technical assistance

Question 6

Pros and cons of a monetary union

Answer 6

Pros:
- non-fluctuating exchange rate: Euro is a more stable currency -> better foreign investment, greater business confidence -> greater international trade as easier to trade if other countries believe in the stability of the currency
- Reduced costs that come from currency conversions: consumers have more money to buy European business services -> business save on trade between Europe -> save on the cost of converting
- Increase of business confidence: exporting firms can plan for the future -> makes future planning of investment easier
- Less prone to speculative attacks: as confidence for foreign investors
- Easier to compare prices between member nations

Cons:
- Loss of monetary policy autonomy: if the is a different set of economic circumstances. No guarantee that policy set will be suitable. Lose control of printing money
- No potential for countries to alter exchange rate. If a country was in need of export based growth cannot depreciate
- Cost of currency conversion is high: costly process -> physical cost of putting new notes in circulation for example
- Lack of fiscal union: Without a fiscal union countries can put their own policies. A reckless use of these policies can destabilise the whole union. Burden for nations in the Eurozone -> other countries have to bail out the other countries

Question 7

Pros of free trade (trading bloc)

Answer 7

Pros:
1. Increase of efficiency and allocation of worlds resources: where there is a free trade there is an incentive for countries to specialise where they have a comparative advantage -> have an opportunity cost advantage
2. Access to goods that wouldn’t be produced domestically
3. Lower prices: increase in consumer surplus, increase in competition -> greater efficiency -> lower costs -> leading to lower prices, economies of scale benefits,
4. Greater consumer choice
5. Economic growth: if countries with a comparative advantage specialise, they can supply the world market. More exports -> (X-M), -> increase in AD -> increase in economic growth

Cons:
1. Trade diversion: when the formation of a free trade area leads to a shift in trade patterns away from more efficient producers. It occurs when a country group replaces more efficient non-memeber countries with less efficient producers - economic inefficiencies. E.g. NAFTA - Mexican producers
2. More integration means if one country is in a financial crisis, other countries will be effected
3. Loss of output due to cheaper competition from lower wage cost countries