MACRO - Trading blocs

Trading bloc

Groups of countries join together to enjoy free trade

Ex:- EU, SAPTA, MEFTA

Types of trading blocs; 1. Preferential trade area (P.T.A)

Countries agree to eliminate trade barriers on certain goods between member countries

Types of trading blocs; 2. Free trade area (FTA)

Agree to eliminate trade barriers on all goods between member countries

Types of trading blocs; 3. Custom union

Agree to eliminate trade barriers between member counties & have a common eternal tariff policy against non-member countries.

Types of trading blocs; 4. Common market

In addition to free trading goods & services - free movement of capital & labor - can exchange factors of production

Types of trading blocs; 5. Economic union

In addition to freely trading all economical resources, they agree to have common economic policies - full economics intergration

Types of trading blocs; 6. Monetary union

Countries use common currency apart from enjoying free trade & economic integration

Benefits of trade bloc

• Lower prices

• Access to wider choice of goods - depending on size of bloc & type of agreement

• Access to more markets within bloc

• Economic integration

• Better bonds & corporation between member countries

• Free movement of factors of production - helps investments & job creation

Drawbacks

• Trade diversion - when a country starts trading within a trade bloc when another non-member country sells it for cheaper

• Economic inefficiency - inefficient producers within the trade bloc will have more demand that efficient producers outside the bloc

• May result in regional monopolies

• Could be high admin cost for members - due to harmonizing rules/regulation & ensuring good quality inside the trade bloc

• External shocks - Countries will be exposed to member countries problems