Trading Blocs

Trade creation- occurs when a country consumes more imports from a low cost prodcuer and fewer from a high cost producer

Trade diversion- occurs when trade shifts to a less efficient producer (usually a country might stop importing from a cheaper producer outside a trading bloc to a more expensive one inside the trading bloc)

The UK trades mainly within the trading bloc

Free trade area- where countries agree to trade goods with other members without protectionist barriers e.g NAFTA (they allow members to exploit their comparative advantageas, which increases efficiency)

Custom unions- countries in a customs union have established a common trade policy with the rest of the world. They might use a common external tariff. They also have free trade between members e.g EU (European Union)

Common Market- this establishes free trade in goods and services, a common external tariff and allows free movement of capital and labour across borders.

• Reduced transaction costs

since there are no barriers to trade or no border controls, it is cheaper and simpler to trade

• Economies of scale

firms can take advantage of a larger potential market in which to trade e.g the EU has 500 million people to sell to

• Enhanced competition

since firms operate in a more competitive market, they become more efficient and there is a better allocation of resources

• Migration

by being a member of a Customs Union, the supply of labour is increased which could halp fill labour shortages 

Trading blocs create a high degree of dependecy on the perfomance of member economies.

• increases vulnerabliltiy of the economy to external shocks 
• e.g global credit crunch of 2008-2009 (interdependence meant it spread across the globe)