Lesson 40-Trading Blocs

Question 1

Define a trading bloc

Answer 1

A trading bloc consists of countries that are situated in the same region that join together in order to have free trade among them by abolishing all trade barriers to trade such as tariffs and quotas.

Question 2

4 advantages of trading blocs

Answer 2

1. Consumers will have access to to a wide variety of goods at a low price
2. Local firms will have to be more efficient in order to compete.
3. Encourages the inflow of FDI to a country since firms will be encouraged to locate in countries where they have free trade which will lead to economic growth
4. The current account of the BOP of export orientated economies will improve when the exports are free from taxes.

Question 3

5 disadvantages of trading blocs

Answer 3

1. Encourages trade among member countries but will isolate them from the rest of the world.
2. Vulnerable and over dependence on other countries.
3. Worsening of the BOP of some countries as consumers will import in large quantities.
4. Infant industries will suffer and might have to shut down
5. May lead to retaliation when member countries impose taxes on nonmember countries making it difficult for member countries to trade with non member countries.