Assess the economic effects of the growth of trading blocs on the global economy

Authors Avatar by mindcrypt (student)

"Assess the economic effects of the growth of trading blocs on the global economy" [20]

Trading blocs are groups of countries that agree to reduce trade barriers amongst themselves. This is used to promote trade activities within certain areas, whilst also assisting in economically managing specific regions. By implementing trade blocs it provides a means of agreement between the countries within that trade bloc to enable them to benefit from each other through trade.

A trading bloc increases and creates trade between countries. Trade creation occurs when consumption shifts from a high cost producer to a low cost producer. For example, if the UK started taxing imported Brazilian sugar, but did not tax imported European Union sugar, consumption would shift to European Union sugar because it is cheaper than Brazilian. Low cost imports lead to the imported items having a lower price tag which then leads to greater consumption, with increased demand resulting from lower prices. This leads to greater efficiency for the consumer which means that EU sugar has the comparative advantage. As shown in the graph, as aggregate demand in the trade bloc increases, so does output, and real GDP.

Join now!

However although real GDP may rise, depending on the elasticity of the aggregate supply curve, there could be a large rise in the general price level, which could lead to inflation within the trade bloc. Inflation within the trade bloc could also lead to global inflation rates.

Due to the protectionism of the trade bloc, it could lead to rising inequality between the bloc countries and the countries which attempt to import. This can be seen with countries in Africa, and South America who attempt to import raw materials and foodstuffs into the EU, but are prevented ...

This is a preview of the whole essay