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. It is estimated that it will increase trade by 20% and boost EU GDP by 12 billion euros. (Source: http://www.theguardian.com/business/2016/oct/30/eu-canada-sign-ceta-free-trade-deal-trudeau-junker) (a) Which one of the following is most likely to decrease as a result of CETA? A. Economic growth in EU countries B. Exports from EU countries to Canada C. Imports from Canada to EU countries D. Tariffs on European exports to Canada (b) With reference to the theory of comparative advantage, explain how CETA may increase the GDP of both the EU and Canada.

A-Level Edexcel Economics A Economic Growth: 1. The trade deal known as the C

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) an... 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?

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Answer

The correct answer is D. Tariffs on European exports to Canada are likely to decrease due to the CETA agreement that aims to eliminate trade barriers. As a result, exports would likely increase, contrary to the decrease implied in option D.

Options A, B, and C are incorrect because they suggest increases in economic growth, exports, and imports respectively within the context of reduced trade barriers, which are expected to boost these aspects rather than reduce them.

Step 2

With reference to the theory of comparative advantage, explain how CETA may increase the GDP of both the EU and Canada.

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Answer

CETA can enhance GDP for both the EU and Canada through the principle of comparative advantage.

Specialization

Countries tend to specialize in producing goods where they have a comparative advantage—that is, they can produce goods at a lower opportunity cost. For example, Canada may specialize in timber due to its natural resources, while the EU could focus on high-technology goods.

Increased Efficiency

As each country focuses on what they can produce more efficiently and trades with each other, the total consumption of goods in both regions will increase. This leads to an overall boost in economic output and GDP.

Trade Expansion

In addition, CETA aims to increase trade by approximately 20%, which will further enhance the flow of goods between the two regions.

Numerical Example

If Canada exports more timber and the EU exports more high-tech goods, both regions can enjoy a greater variety of goods at lower prices, improving the economic welfare of citizens.

This mutual benefit illustrates how free trade agreements like CETA not only increase trade volume but also enhance overall economic productivity, thereby benefiting GDP.