1. International Economics Trade Blocs and Trade Blocks
06/12/61
Session 12
Trade Blocs and Trade Blocks
Aj. Noom Tel

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

4. Compare = Net Gain

5. 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

6. International Economics
06/12/61
2. The more elastic the import demand, the greater the gains Dm
Initial Price in home country (UK) Dm
Price for partner country (Germany)
Outside – world Price (Japan)
Aj. Noom Tel

7. 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.

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

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

10. Export Increased Consumer Surplus Decreased Producer Surplus Net Loss
Price before embargo
Price after embargo
Export