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1 The trade deal known as the Comprehensive Economic and Trade Agreement (CETA) is designed to eliminate or reduce trade barriers between the European Union (EU) and Canada - Edexcel - A-Level Economics A - Question 1 - 2018 - Paper 2
Question 1
1 The trade deal known as the Comprehensive Economic and Trade Agreement (CETA) is designed to eliminate or reduce trade barriers between the European Union (EU) and... show full transcript
Worked Solution & Example Answer:1 The trade deal known as the Comprehensive Economic and Trade Agreement (CETA) is designed to eliminate or reduce trade barriers between the European Union (EU) and Canada - Edexcel - A-Level Economics A - Question 1 - 2018 - Paper 2
Step 1
Which one of the following is most likely to decrease as a result of CETA?
Answer
The correct option is D: Tariffs on European exports to Canada are likely to decrease as a result of CETA, which aims to reduce trade barriers. This is because the agreement focuses on enhancing trade by minimizing tariffs, rather than affecting economic growth or the volume of exports/imports.
Step 2
With reference to the theory of comparative advantage, explain how CETA may increase the GDP of both the EU and Canada.
Answer
Comparative Advantage and GDP Growth
Countries usually have different capabilities and efficiency in producing goods. CETA promotes this through comparative advantage. Here’s a breakdown:
Specialization
Countries will focus on producing goods they can create more efficiently, utilizing lower opportunity costs. For example, if Canada can produce timber more efficiently than the EU, it should specialize in timber production.
Increased Consumption
When countries specialize, they can trade and consume more than they could produce independently. Through CETA, both Canada and the EU can enhance their total consumption, leading to higher overall economic output.
Trade Expansion
With the agreement estimated to increase trade by 20%, the movement towards freer trade benefits both parties by facilitating easier access to markets. This can lead to increased exports from the EU to Canada and vice versa, resulting in GDP growth.
Economic Growth
More efficient production methods and increased trade lead to a rise in GDP as countries engage in higher levels of production and consumption. Through CETA, we expect tax revenues to increase, investments to rise, and overall economic development, hence boosting both the EU and Canadian economies.