The table shows how trade has changed between two economic blocs after forming a free trade area. Indicator Before FTA After FTA Intra-bloc trade ($ billion...
Question 1 Report
The table shows how trade has changed between two economic blocs after forming a free trade area.
| Indicator | Before FTA | After FTA |
|---|---|---|
| Intra-bloc trade ($ billion) | 150 | 280 |
| Trade with non-members ($ billion) | 200 | 170 |
| Total trade ($ billion) | 350 | 450 |
Answer Details
The correct answer is both trade creation and trade diversion.
Trade creation occurs when the formation of a trading bloc leads to an increase in total trade. Here, total trade rose from $350 billion to $450 billion, an increase of $100 billion, confirming trade creation has taken place.
Trade diversion occurs when trade is redirected from more efficient non-member producers to less efficient member producers because of preferential access within the bloc. Trade with non-members fell from $200 billion to $170 billion, a decline of $30 billion, while intra-bloc trade nearly doubled from $150 billion to $280 billion. This shift away from non-members and towards members is evidence of trade diversion.
Since the data shows both an increase in total trade and a shift away from non-members, the correct conclusion is that both effects are present. It is not trade creation only (non-member trade fell) or trade diversion only (total trade increased).
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