Trading block

Question 1

What is a trading bloc

Answer 1

when countries join together and agree to remove trade barriers such as tariffs, quotas, subsidies to domestic producers and non-tariff barriers.

Question 2

List the diffrent kinds of trading bloc’s

Answer 2

1) Free trade areas
2) Customs unions
3) Common markets
4) Montary unions

Question 3

What is a free trade area, give an example?

Answer 3

In a free trade area, trade barriers are removed between member countries. However, member countries can set their own trade barriers on non-member countries e.g. the USMCA

Question 4

What is a customs union, give an example.

Answer 4

In a customs union, all trade barriers are removed between membercountries. Also, all member countries must have a common external tariff on imports from non-member countries.
e.g. Southern African customs union, European union

Question 5

What is a common market give an example ?

Answer 5

In a common market, all trade barriers are removed between member countries. Also, all member countries must have a common external tariff on imports from non-member countries. Also, there is free movement of the factors of production.
European single market (EU+other countries)

Question 6

What is a common external tarrif?

Answer 6

where member countries must all charge the same tariff on goods imported from non-member countries.

Question 7

What is a Montary union?

Answer 7

In a monetary union, all trade barriers are removed between member countries. Also, all member countries must have a commonexternaltariff on imports from non-member countries. Also, there is a common currency.
Eurozone, has some EU members

Question 8

Write the definition of: The European Union

Answer 8

The European Union is a customs union with 27 member countries. They have removed trade barriers between each other and share a common external tariff with non-EU countries.

Question 9

Write the definition of: The European Single Market

Answer 9

The European Single Market is a common market, which means that factors of production, like labour, can move freely between the 31 countries.

Question 10

Write the definition of: The Eurozone

Answer 10

The Eurozone is a monetary union meaning that all 20 of its members have adopted a common currency - the Euro

Question 11

What are the two main effects of trading blocs?

Answer 11

1) Trade creation
2) Trade diversion

Question 12

Sketch the world supply curve following the imposition of a tariff. Label the new quantity of imports.

Answer 12

The world supply curve is a horizontal line because it is perfectly elastic. The tariff will increase the price of imports and so it will shift the world supply curve up. The new quantity of imports is the difference between domestic demand and domestic supply at the new price as shown below.

Question 13

What quantity of chickens will the Mexicans import with the 75% tariff?

Answer 13

2millions
With the tariff, the price of chicken will be 70 pesos. At this price, Mexican consumers will demand 16 million chickens and Mexican producers will supply 14 million chickens. So, the difference between these (16 million - 14 million) will be 2 million and this is the quantity that is imported.

Question 14

What will occur following the removal of the tariff?

Answer 14

The removal of the tariff will decrease the price leading to a contraction in domestic supply and an extension in domestic demand as shown below. This will increase the quantity of imports.

Question 15

What is Trade Diversion?

Answer 15

when trade is diverted from low cost producers outside a trading bloc to high cost producers inside a trading bloc.

Question 16

Write the definition of: Trade Creation

Answer 16

When the removal of tariffs means that the quantity of imports increases and trade is created.