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