3.1.3 trading blocs

What is trade creation

when countries import more from low-cost producers within a trading bloc instead of high-cost producers

What is trade diversion

when trade shifts from a cheaper producer outside a trading bloc to a more expensive producer inside the bloc

Why do trading blocs cause trade diversion

because protectionist barriers are imposed on non-members

Why does the UK trade mainly with the EU

because of EU membership which reduced trade with Commonwealth countries

What is a free trade area

countries trade freely with each other but keep their own external trade policies

Give an example of a free trade area

NAFTA or EFTA

What is a customs union

free trade between members plus a common external tariff on non-members

Give an example of a customs union

the European Union

What is a common market

a customs union with free movement of labour and capital

What is one benefit of trading blocs for firms

reduced transaction costs due to fewer trade barriers

How do trading blocs create economies of scale

firms gain access to a larger market and can specialise

How do trading blocs increase competition

firms face more rivals which forces efficiency

What is dynamic efficiency

long-run efficiency gains from innovation and investment

How does a customs union affect migration

increases labour mobility which can fill labour shortages

What is a disadvantage of labour migration in trading blocs

some countries may lose skilled workers

What is growing interdependence

countries become reliant on each other’s economic performance

Why does interdependence increase economic risk

shocks like recessions can spread between member states

Why did the 2008 financial crisis show interdependence

economic problems spread quickly across trading bloc economies