The average cost of production is decreased because mass production is allowed. The larger markets created via trading blocs permit economies of scale. Increases economic leverage for the trading bloc as a whole. Open trade leads to faster transfer of technology across borders. It increases local investments since the trading bloc increases the overall size of markets for firms.
Size of MarketĪn increase in foreign direct investment results from trade blocs and benefits the economies of participating nations. Thus, the member country may start importing from other member countries since the price becomes artificially cheaper than buying from the previous non-member country. When a trade bloc is formed, an external tariff maybe be applied to non-member countries, making some goods that were initially cheaper, now more expensive. The more efficient producer produces, leading to less wastage of scarce resources. Trade CreationĮliminations of trade barriers for member countries increase domestic production and consumption. – Union of South American Nations (Unasur/Unasul) 1.
Trading blocs definition economics free#
– North American Free Trade Agreement (NAFTA) For example, the European Union is an economic union. Economic UnionĪn Economic Union has the same benefits as a common market but there is a common tax system and employs the same currency. For example, no permits are required to work in another member country. Common MarketĪ Common Market is like a customs union but there is a free flow of factors of productions between the countries. Customs UnionĪ Customs Union is like a free trade area except that member countries maintain a common tariff against non-member countries. For example, the North American Free Trade Agreement ( NAFTA) between the USA, Canada & Mexico created a free trade area. Two or more countries form a Free Trade Area in which trade barriers between the countries are abolished but each country maintains its own tariffs against non-member countries.
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