Trading Blocs And WTO

Question 1

List the type of trade blocs

Answer 1

1. Free trade area
2. Custom Union
3. Common market
4. Monetary Union

Question 2

Define free trade area

Answer 2

Removes internal trade barriers between members, but
allows trade barriers against non-members

Question 3

Define customs Union

Answer 3

Removes all trade barriers between members and a common external tariff on non-member countries.

Question 4

Define common market

Answer 4

No internal trade barriers between members, a common external tariff, and free movement of factors of production

Question 5

Define monetary Union

Answer 5

Countries who share a common currency, monetary policy.

Question 6

Define trade creation

Answer 6

switch from buying products from a high cost producers to a low cost producer

Question 7

Define trade diversion

Answer 7

When country switches from buying products from a

low cost producer to a high cost producer

Question 8

What might trade creation depend on

Answer 8

1. Time and Size of removal of trade barriers
2. Non price factors (loyalty, quality)
3. Other factors - Exchange rate/State of the economy

Question 9

Benefits of trading blocs and evaluate

Answer 9

1. economic growth (exports more price competitive -> improvement in (X-M) -> AD rises -> Real GDP rises)
2. Employment rises due to rise in export demand

EV
1. trade diversion may occur due to efficient producer outside of bloc

2. brain drain may occur for poorer countries

Question 10

Conditions for successful monetary Union

Answer 10

1. Spending control: Countries control fiscal budget to prevent economic imbalances.’

If one country defaults, others might have to bail it out

2. Similar economic state: Ensuring member countries have similar inflation rates, interest rates, and budget deficits.

High inflation in one country and low in another = problems with prices and competitiveness.

3. A common monetary policy: European Central Bank (ECB) in the Eurozone.
4. Trust to the union: give up control (exchange rates) -> avoid conflict

Question 11

Possible conflicts between RTA and WTO

Answer 11

1. RTA rules contradict WTO principles
   - trade discrimination/ tariff on non members
   - leads to trade diversion

eg . Protectionism policy against non-members, causing trade diversion

Question 12

what are the main roles of WTO

Answer 12

1. Negotiate/implement trade agreements
2. Platform for trade negotiations
3. Monitor trade policies on country

Question 13

Difference between regional trade agreements and bilateral trade agreements

Answer 13

Regional is a trade agreement with members within a region

Bilaterial: agreement between 2 countries