"Countries usually experience substantial net economic gains from joining trade blocs." Do you agree or disagree with this statement? Why? In your answer, include discussion of the roles of trade creation and trade diversion. Also include discussion of other gains or losses that can arise in a country that chooses to join a trade bloc.

What will be an ideal response?

POSSIBLE RESPONSE: In general, the formation of trade blocs does not always lead to an improvement of economic well-being worldwide, or even in the member countries. On the one hand, the formation of trade blocs is a removal of some trade barriers and thus a step toward free trade. This can be beneficial to the country if it leads to lowering of domestic prices, higher trade volumes, and higher surplus (trade creation gain). On the other hand, the formation of trade blocs can lead to shifting of imports to less-efficient producers in partner countries who gain an advantage over more-efficient producers in countries that are not members of the trade bloc. This shifting of imports is called trade diversion and creates a welfare loss for the member country. Whether or not a country gains from joining a trade bloc depends on the benefits from trade creation, the losses from trade diversion, and the possible gains from an array of other effects that may be difficult to quantify. These additional possible sources of benefits include the following. 

First, an increase in competition can reduce prices. If, before the formation of the bloc, firms in the different member countries had monopoly power in each national market, then, when national markets are joined in a bloc-wide market, firms bloc-wide must compete with each other. Prices are likely to move closer to marginal costs. 

Second, an increase in competition can lower costs of production. The increased level of competition increases the pressure on firms to implement new technologies and minimize costs. 

Third, firms can lower costs by expanding their scale of production. Before the formation of a bloc, each firm may have been limited to serving only its national market. If scale economies are substantial, the expansion of firm sales in the bloc-wide market can lower its cost of production. 

Finally, forming a trade bloc might lead to additional opportunities for business investments. By expanding the market that can be served, a trade bloc might be able to attract more foreign direct investment into the member countries.