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POSSIBLE ADVANTAGES & DISADVANTAGES TO JOINING A TRADING BLOC

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by

Todd Cota

on 13 October 2016

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Transcript of POSSIBLE ADVANTAGES & DISADVANTAGES TO JOINING A TRADING BLOC

POSSIBLE
ADVANTAGES
&
DISADVANTAGES
TO JOINING A TRADING BLOC

design by Dóri Sirály for Prezi
ADVANTAGE
CAUSES DOMESTIC PRODUCERS TO BECOME EFFICIENT
DECREASES COST FOR CONSUMERS
IMPROVED ALLOCATION OF RESOURCES
3) ECONOMIES OF SCALE
Economies of Scale: Decreases in the average costs of production over the long run as a firm increases all its inputs. (Long Run Costs Fall = Economies of Scale)
Specialization (management specialization)
Division of Labor (break down production process)
Bulk Buying (negotiate discounts)
Financial Economies (Lower interest rates on loans)
Transport Economies (shipping bulk=less delivery costs)
Large Machines (ownership instead of rental)
Promotional Economies (fixed costs -- costs do not increase as output increases)
ADVANTAGE
2) EXPANSION INTO LARGER MARKETS
DISADVANTAGE
1) TRADING BLOCS MAY NOT BE THE BEST WAY TO ACHIEVE TRADE LIBERALIZATION (INCREASED DISCRIMINATION TOWARD NON-BLOC MEMBERS)
DISADVANTAGE
2) MAY CREATE OBSTACLES TO ACHIEVEMENT OF FREE TRADE ON A GLOBAL SCALE
1) INCREASED COMPETITION
INCREASES EXPORT POSSIBILITIES
GREATER ECONOMIC GROWTH
INCREASES PRODUCTION POSSIBILITIES CURVE
4) LOWER PRICES FOR CONSUMERS & GREATER CONSUMER CHOICE
ELIMINATION OF TRADE BARRIERS = INCREASED COMPETITION = ECONOMIES OF SCALE = LOWER PRICES = GREATER VARIETY OF G&S
5) INCREASED INVESTMENT
INTERNAL (INSIDE BLOC)
MNC's
EXTERNAL (OUTSIDE BLOC)
MNC's
ADVANTAGE
ADVANTAGES
ADVANTAGE
ADVANTAGE
6) BETTER USE OF FACTORS OF PRODUCTION: IMPROVED RESOURCE ALLOCATION
PARTICULARLY APPLICABLE FOR A COMMON MARKET
FREE MOVEMENT OF FOP = IMPROVED RESOURCE ALLOCATION
MOVEMENT OF HUMAN CAPITAL TO EMPLOYMENT OPPORTUNITIES
MOVEMENT OF FINANCIAL CAPITAL TO HIGHER PROFIT AREA
ADVANTAGE
7) IMPROVED EFFICIENCY IN PRODUCTION & GREATER ECONOMIC GROWTH
ADVANTAGE
8) POLITICAL ADVANTAGES
GREATER ECONOMIC INTEGRATION = REDUCED HOSTILITIES BETWEEN COUNTRIES DUE TO INTERDEPENDENCE
INCREASED TRADE, INVESTMENT, LABOR & FINANCIAL FLOWS

DISADVANTAGE
3) UNEQUAL DISTRIBUTION OF GAINS & POSSIBLE LOSSES
MONETARY UNION
HIGH LEVEL OF INTEGRATION
COMMON CURRENCY
COMMON CENTRAL BANK
ADVANTAGES
ELIMINATION OF EXCHANGE RATE RISK & UNCERTAINTY
ELIMINATES TRANSACTION COSTS
ENCOURAGES PRICE TRANSPARENCY
INCREASED INWARD INVESTMENT
LOW RATES OF INFLATION = LOW INTEREST RATES = INCREASED INVESTMENT = INCREASED OUTPUT

DISADVANTAGES
LOSS OF EXCHANGE RATES AS MECHANISM FOR BOP ADJUSTMENT
LOSS OF MONETARY POLICY
MONETARY POLICY PERSUED BY SINGLE CENTRAL BANK CAUSES INEQUITABLE IMPACTS
FISCAL POLICY IS CONSTRAINED BY CONVERGENCE REQUIRMENTS (e.g. ECB)
TOTAL PUBLIC DEBT CANNOT BE 60% OF GDP
BUDGET DEFICIT NO GREATER THAN 3% OF GDP
IMPROVED UTILIZATION OF FOP = INCREASED EFFICIENCY IN PRODUCTION = INCREASED GROWTH POTENTIAL
TRADING BLOCS ARE INFERIOR TO THE WTO's MULTILATERAL APPROACH OF REDUCING TRADE BARRIERS TOWARDS ALL COUNTRIES.
REGIONALISM CREATED BY TRADING BLOCS MAY SLOW DOWN & INHIBIT FREE TRADE
DECREASED GLOBAL ALLOCATION OF RESOURCES
LOWER GLOBAL OUTPUT
WEAKER WTO
COUNTRIES WITHIN BLOC HAVE UNEQUAL GAINS
CONFLICT CREATION BETWEEN MEMBERS
DECREASE IN UNANIMOUS AGREEMENTS (AS COUNTRIES EXPERIENCE THE INEQUITIES)
TRADE CREATION: SHORT RUN ('STATIC') BENEFITS
HIGHER COST PRODUCTS (IMPORTED OR DOMESTICALLY PRODUCED) ARE REPLACED BY LOWER COST IMPORTS, AFTER FORMATION OF OR ENTRANCE INTO, A TRADING BLOC.
TRADE DIVERSION: SHORT RUN ('STATIC') COSTS
LOWER COST IMPORTS ARE REPLACED BY HIGHER COST IMPORTS FROM A MEMBER WITHIN A TRADING BLOC.
HAPPENS AFTER FORMATION OF OR ENTRANCE INTO A BLOC
ECONOMIC INTEGRATION:
ECONOMIC CO-OPERATION & CO-ORDINATION OF ECONOMIC POLICIES THAT LEAD TO INCREASED ECONOMIC LINKS, OCCUR BECAUSE OF A MULTITUDE OF POSSIBLE BENEFITS... BUT CAN ALSO HAVE COSTS.
LONG-TERM ('DYNAMIC' BENEFITS/COSTS)
SHORT-TERM ('STATIC' BENEFITS/COSTS)
Analyze the Trade Diversion graph.
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