Trade Blocs and Trade Blocks

Frederick University

2012

Types of Economic Blocs Type of Bloc

Free Trade among the members

Common external tariffs

Free factor movement

Policies harmonization

Free trade area

X

X

X

X

Customs Union X

Common market

X X

Economic Union

X X X

Trade DiversionP

Q

D

Initial price (with a tariff) in CyprusP0

Egyptian price

Q0 Q1

P1

Greek priceP2

Q2

All rice Q0 is imported from Egypt

Imports from Egypt are replaced byImports from Greece (an EU member)

A

Extra imports Q0 + Q2 are created

B – national loss = (P2 – P1) x Q0

B

Trade diversion = B - A A – Cyprus gain

C

C – tariff collections shift to consumer surplus in Cyprus

Trade CreationP

Q

D

Initial price (with a tariff) in CyprusP0

Egyptian price

Q0 Q1

P1

Greek priceP2

Q2

All rice Q0 is imported from Egypt

Imports from Egypt are replaced byImports from Greece (an EU member)

A Extra imports Q0 + Q2 are created

B – national loss = (P2 – P1) x Q0

B

Trade creation = A - B

A – Cyprus gain

C

C – tariff collections shift to consumer surplus in Cyprus

Terms of Trade

TT = Ix : I m

Ix = P1x Q0v : P0 x Q0x

I m = P1m x Q0m : P0m x Q0m

Terms of Trade Use the data from Table 1 to calculate and explain the Terms of

trade of Leisureland if it imports goods A, D, and C and exports goods B, E, and F.

  Q of A

P of A

Q of B

P of B

Q of C

P of C

Q of D

P of D

Q of E

P of E

Q of F

P of F

2010 25 $40 20 $50 150 $60 10 $40 100 12 70 60

2011 22 $45 30 $40 120 $70 15 $40 150 10 60 70