Paper 3 question on trade creation and diversion
This paper three question on trading blocs should be completed in 50 minutes. While paper three type questions are only part of the higher level syllabus, I will also give paper three exercises to my standard level students to complete, as it provides good practise for all economics students. The question is based on data and text that the students need to use to answer the different sub-questions.
Paper 3 style examination question
Maximum mark for this question 30
Turkey is a middle income country, whose economy has struggled with high rates of inflation and falling living standards in recent years. As part of a wider policy to grow its economy and reach fully developed status, the nation negotiated membership of the European Free Trade Association in 2018.
Macroeconomic indicators 2017-2020:
GDP per capita $
Exchange rate $ to TL
They produce bread domestically which they make from a combination of domestically produced and imported corn. Prior to joining the FTA the government imposed a tariff on corn imports but after joining the organisation they were forced to remove these. This reduced the price of corn in the country to $ 5 per Kg.
Define the following terms:
(a) i. Preferential trade area (PTA) [1 mark]
ii. Monetary union [1 mark]
iii. Common market [1 mark]
(b) i. Calculate the total revenue spent on corn by consumers prior to joining the FTA? [1 mark]
ii. Calculate the amount spent by consumers on corn after joining the FTA? [1 mark]
iii. Prior to the removal of the tariff what was the level of tax revenue generated by the import tax? [1 mark]
iv. Calculate the change in revenue gained by domestic producers and imported producers after the removal of the tariff. [2 marks]
v. Which area represents the gain in consumer surplus after the tariff was removed? [2 marks]
vii. Which area represents the deadweight loss resulting from the imposition of the original tariff? [2 marks]
(c) Explain the impact of membership of the free trade area on the following stakeholders: [4 marks]
- domestic producers
- the government.
(e) Explain the difference between trade diversion and trade creation. [2 marks]
(f) Based on the information included in the passage and your knowledge of economics, recommend a policy which the Turkish government might employ to grow its economy and improve living standards. [10 marks]
The paper three type questions above can be accessed as a PDF worksheet at: P3 questions
The P3 mark scheme with responses is available at: Mark scheme