Session 12 Trade Blocs and Trade Blocks

The Basic Theory of Trade Blocs : Trade Creation and Trade Diversion Outside – world Price (Japan) Price for partner country (Germany) Price with tariff for non – partner Dm Increased Consumer Surplus (When tariff is waived) Decreased Government’s Revenue Compare = Net Loss

Compare = Net Gain

Two Tendencies Making Greater Gains from a trade bloc 1. The lower the partner cost relative to the outside-world cost, the greater the gains

2. The more elastic the import demand, the greater the gains Outside – world Price (Japan) Price for partner country (Germany) Initial Price in home country (UK) Dm

Other Possible Gains from A Trade Bloc  An increase in competition can reduce prices.  An increase in competition can lower cost of production.  Firms can lower costs by expanding their scale of production.

Trade Embargoes An embargo is a legal declaration by a nation that it will not trade commercially with another nation, usually until certain demands are met. As opposed to an embargo, a boycott is organized by individuals or non-state organizations and has no legal power. Boycott

Importing Country Facing Embargo Sn + Se (Supply from non-embargoing & embargoing countries) Dm Sn Decreased Consumer SurplusDecreased Producer Surplus for embargo country Increased Producer Surplus for non-embargo country

Price before embargo Price after embargo Export Increased Consumer SurplusDecreased Producer SurplusNet Loss