trading blocs and the WTO

Question 1

trading blocs

Answer 1

group of countries that agree to reduce or eliminate trade barriers between themselves. eg the EU

Question 2

types of trading blocs: free trade area

Answer 2

trade barriers are removed between member countries but each member can impose trade restrictions on non- members

Question 3

types of trading blocs: custom unions

Answer 3

free trade between member countries combined with a common external tariff on goods from countries outside the custom union

Question 4

types of trading blocs: common market

Answer 4

the same characteristic as a custom union but include the free movement of factors of production between member counties

Question 5

types of trading blocs: monetary unions

Answer 5

adopt a common currency. eg the eurozone

Question 6

costs of regional trade agreements (trade blocs) (2)

Answer 6

trade diversion (when trade is diverted from a more efficient producer outside the bloc, due to tariffs, to a less efficient producer within the bloc), distortion of comparative advantage (decrease in specialisation and fall in world output due to trade barriers against non members)

Question 7

benefits of regional trade agreements (trade blocs) (3)

Answer 7

trade creation (increased trade between countries within the bloc), increase in FDI (TNCs would have unrestricted access in selling goods to consumers in the bloc), increase in economic power (large trading bloc may be in a better position to negotiate trade agreements with others)

Question 8

costs of monetary unions (3)

Answer 8

transition costs (one-off costs associated with changing menus, price lists etc. wen currency is introduced), loss of independent monetary policy (countries have no control of their own interest rates), loss of exchange rate flexibility (no longer have own currency)

Question 9

benefits of monetary unions (3)

Answer 9

eliminations of transaction costs, price transparency (consumers have ability to compare prices more easily), elimination of currency fluctuations between member countries (could encourage increased business investment)

Question 10

the role of the WTO in trade liberalisation

Answer 10

to promote free trade and to settle trade disputes between member counties

Question 11

possible conflicts between regional trade agreements and the WTO

Answer 11

trade blocs restrict trade with non members, which conflicts the aims of the WTO. However both the number and the size of these trade blocs have been increasing, so they play an important role in promoting free trade