Presentation on theme: "Session 12 Trade Blocs and Trade Blocks. The Basic Theory of Trade Blocs : Trade Creation and Trade Diversion Outside – world Price (Japan) Price for."— Presentation transcript:
The Basic Theory of Trade Blocs : Trade Creation and Trade Diversion Outside – world Price (Japan) Price for partner country (Germany) Price with tariff for non – partner Dm Increased Consumer Surplus (When tariff is waived) Decreased Government’s Revenue Compare = Net Loss
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
2. The more elastic the import demand, the greater the gains Outside – world Price (Japan) Price for partner country (Germany) Initial Price in home country (UK) Dm
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.
Trade Embargoes An embargo is a legal declaration by a nation that it will not trade commercially with another nation, usually until certain demands are met. As opposed to an embargo, a boycott is organized by individuals or non-state organizations and has no legal power. Boycott
Importing Country Facing Embargo Sn + Se (Supply from non-embargoing & embargoing countries) Dm Sn Decreased Consumer SurplusDecreased Producer Surplus for embargo country Increased Producer Surplus for non-embargo country
Price before embargo Price after embargo Export Increased Consumer SurplusDecreased Producer SurplusNet Loss