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 XX Economic Union X XX

Trade Diversion P Q D Initial price (with a tariff) in Cyprus P0P0 Egyptian price Q0Q0 Q1Q1 P1P1 Greek price P2P2 Q2Q2 All rice Q 0 is imported from Egypt Imports from Egypt are replaced by Imports from Greece (an EU member) A Extra imports Q 0 + Q 2 are created B – national loss = (P 2 – P 1 ) x Q 0 B Trade diversion = B - A A – Cyprus gain C C – tariff collections shift to consumer surplus in Cyprus

Trade Creation P Q D Initial price (with a tariff) in Cyprus P0P0 Egyptian price Q0Q0 Q1Q1 P1P1 Greek price P2P2 Q2Q2 All rice Q 0 is imported from Egypt Imports from Egypt are replaced by Imports from Greece (an EU member) A Extra imports Q 0 + Q 2 are created B – national loss = (P 2 – P 1 ) x Q 0 B Trade creation = A - B A – Cyprus gain C C – tariff collections shift to consumer surplus in Cyprus

Terms of Trade TT = I x : I m I x = P 1 x Q 0v : P 0 x Q 0x I m = P 1m x Q 0m : P 0m x Q 0m

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 $4020$50150$6010$ $4530$40120$7015$