(a) State two features each of: (i) free trade area; (ii) common markets. (b) outline two advantage and two disadvantage of a common market.

Answer Details

(a) Two features each.

Free trade area:

• Member countries abolish tariffs and other trade barriers on goods traded among themselves.
• Each member retains its own separate tariff and trade policy towards non-member (outside) countries.

Common market:

• Members remove internal trade barriers and adopt a common external tariff against non-members (so it also forms a customs union).
• There is free movement of the factors of production (labour and capital) as well as goods and services among member states.

(b) Advantages of a common market (any two):

• Larger market: producers sell to a wide combined market, enjoying economies of scale and lower average costs.
• Free movement of factors: labour and capital move to where they are best rewarded, improving efficient use of resources and reducing unemployment.

Disadvantages of a common market (any two):

• Loss of revenue and sovereignty: members give up some tariff revenue and control over their own trade policy to the common external tariff.
• Harm to infant industries: weaker local industries may be driven out of business by stronger competitors from other member states.