Trade Blocs and Trade Blocks Frederick University 2012

Types of Economic Blocs Type of Bloc Free Trade among the members Free trade area X Customs Union X Common market Economic Union X X Common external tariffs Free factor movement Policies harmonization X X X

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

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

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

Use the data from Table 1 to calculate and explain the Terms of Trade of trade of Leisureland if it imports goods A, D, and C and exports goods B, E, and F. Q of P of Q of P A A B B C C D of D Q P of Q of P of of E E F F 2010 25 $40 20 $50 150 $60 10 $40 100 12 70 60 2011 22 $45 30 $40 120 $70 15 $40 150 10 60 70