A free trade area is just a trading bloc that involves several countries trading in between themselves with no boundaries in place.
Yet, a customs union involves a free trade area as it is one step higher in the economic integration. instead of just not having any trading boundaries between the bloc countries, They have also agreed on common external trading barriers put in place for countries outside of the customs union.
An example of a free trade bloc is NAFTA, consisting of Mexico, Canada and United States of America.
Example of a customs union is CARICOM, consisting of Antigua, Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, Saint Kitts and Nevis, Saint Lucia, Saint Vincent, the Grenadines, Suriname, Trinidad and Tobago.
2. Discuss the likely effects of a membership of a customs union. Use a real world example.
From stepping into a customs union a member is likely to experience either trade creation or trade diversion. As well as membership can also increase the market size as well bring more diversity and development of products such as technology. Yet if country A has higher production costs of certain goods than other countries in the bloc, country A might experience higher unemployment than before due to production shifting from their country to the others and vice versa.
Trade creation- a reduction in tariff barriers leading to an increase in consumer surplus and economic welfare. As well as production going from a higher cost producer to a lower cost producer therefore leading to a regain of world efficiency.
Trade diversion-international economics in which trade is diverted from a more efficient exporter towards a less efficient one, causing welfare loss as well as loss of world efficiency.
Example: UK joined EU, they had a comparative advantage in the production of lawn mowers, resulting in trade creation in the EU when trading barriers are removed. Before the French were making lawnmowers on a higher cost. Now consumers benefit from lower costs of lawnmowers from England as well as there is regain of world efficiency.
3. Evaluate the consequences of membership of a monetary union. Use a real world example.
The consequences include:
the reduction in transactions cost of changing currency;
the reduction of exchange risk leading to greater trade and foreign investment, and to a lower risk premium embodied in the cost of raising capital;
increased transparency in price comparison;
political gains of closer union and cooperation brought about the greater closeness of economic relationships; - preparation for complete economic and monetary integration as well as keeping relations smooth
Example: European Union
3. Evaluate the consequences of membership of a monetary union. Use a real world example.
The consequences include:
the reduction in transactions cost of changing currency;
the reduction of exchange risk leading to greater trade and foreign investment, and to a lower risk premium embodied in the cost of raising capital;
increased transparency in price comparison;
political gains of closer union and cooperation brought about the greater closeness of economic relationships; - preparation for complete economic and monetary integration as well as keeping relations smooth
Example: European Union
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