Trading blocs

Question 1

What is a trading bloc

Answer 1

A group of countries that have signed an agreement to reduce or eliminate any trade barriers or other protectionist measures among themselves

Question 2

What is the unique feature of a preferential trading area

Answer 2

Where trade barriers are reduced or removed on some goods traded between member countries

Question 3

What is the unique feature of a free trade area

Answer 3

The reduction or removal of trade barriers on all goods between member countries

Question 4

What is the unique feature of a customs union

Answer 4

Common external trade barriers with non-member countries

Question 5

What is the unique feature of a common market

Answer 5

Free movement of factors of production

Question 6

What is the unique feature of a monetary union

Answer 6

Two or more members share the same currency in which the exchange rate is monitored by one central back
-Common currency
-Co-ordinated monetary policy

Question 7

What is trade creation

Answer 7

Where trading blocs result in high cost producer outside the trading bloc being replaced by a low cost producer within the trading bloc

Question 8

What is trade diversion

Answer 8

Where trading blocs result in low cost producer outside the trading bloc being replaced by a high cost producer within the trading bloc

Question 9

Advantages of trading blocs

Answer 9

-Free trade encourages specialisation and will increase output if countries follow the theory of comparative advantage
-Firms in member countries have a larger consumer market
-Increased competition will lead to innovation as well as lower prices
-Increased choice for consumers
-Job creation

Question 10

Disadvantages of trading blocs

Answer 10

-Distorts world trade
-Trade diversion could occur
-Unequal distribution of trade
-Firms in non-member countries may be less competitive in international markets
-Reduction in competition