1: Motives for European Integration and Rationales for Trade

Question 1

What is economic integration about?

Answer 1

• discriminatory removal of all trade impediments between at least two participating nations
• establishment of certain elements of cooperation and coordination between them.

Question 2

Name the two types of integration and explain each shortly!

Answer 2

• Negative integration: act of removal of impediments to trade
• Positive integration: relates to the modification of existing instruments and institutions, and to the creation of new ones; directs at proper functioning of the integrated market and broader policy aims

Question 3

What is the background on EEI?

Answer 3

• results of WWII
• achievement of lasting peace in EU
• economic dependency reduces chance of armed conflicts
• economic welfare as objective

Question 4

What are economic aims of integration?

Also briefly describe the contents of EU enlargement.

Answer 4

• Harmonious balanced & sustainable development of economic activities
• high level of employment & of social protection
• Equality of men & women
• Sustainable & non-inflationary growth
• A high degree of competitiveness & convergence of economic performance
• A high level of protection & improvement of the quality of the environment
• The raising of the standard of living & the quality of life
• Economic & social cohesion and solidarity among Member States

Trade integration, monetary integration, common policies

Question 5

Name six reasons for trade!

Answer 5

• Non-availability
• Vent-for-Surplus Hypothesis
• Differences in price
• Economies of scale
• Product differentiation
• Transport costs

Question 6

Explain the theory of Absolute Advantage!

Answer 6

• Adam Smith (1776): The Wealth of Nations
• A country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it.
• Countries should specialize in the production of goods for which they have an absolute advantage and then trade these for goods produced by other countries.

Assumptions

• 2 countries (Greece, Netherlands) produce 2 goods (olives, tulips)
• No transportation costs, constant returns to scale
• Labor (L) is the only factor used in the production process; unit labor requirements (aL) are the number of hours of labor required to produce a good

Question 7

Explain the theory of Competitive Advantage!

Answer 7

• David Ricardo (1817): Principles of Political Economy
• A country should specialize in the production of those goods that it produces most efficiently and to buy the goods that it produces less efficiently from other countries, EVEN IF THAT MEANS BUYING GOODS FROM OTHER COUNTRIES THAT IT COULD PRODUCE MORE EFFICIENTLY ITSELF.
• Consumers in all nations can consume more if there are no restrictions on trade.

⇒ Comparative advantage arises from differences in productivity!

Question 8

Explain the Heckscher-Ohlin-Theory.

Answer 8

• Comparative advantage arises from differences in national factor endowment (production technologies are the same across countries)
• Factor endowment: Extent to which a country is endowed with resources such as land, labor, and capital.
• Countries will export those goods that make intensive use of factors that are locally abundant, while importing goods that make intensive use of factors that are locally scarce.

Question 9

Explain the Leontief-Paradoxon using an example.

Answer 9

• Observation that USA, which are relatively abundant in capital compared to other nations, are in fact rather an exporter of less capital intensive products compared to its imports.

Potential explanations?

• US has better research endowment, highly-skilled technicians to invent new products.

Empirical evidence – which theory is best to describe trade?

• comparative advantage

Question 10

Explain economies of scale!

Answer 10

• Economies of scale: Doubling the inputs to an industry will more than double the industry’s production.
• External economies of scale vs. Internal economies of scale

Assumptions

• Both countries are capital abundant
• Cost of production is the same in both countries
• Production of 1 differentiated product
• Because of economies of scale, neither country is able to produce the full range of manufactured products by itself; thus, although both countries may produce some manufactures, they will be producing different things.
• In this case gains from trade also include the availability of a larger variety of a certain product.

Question 11

Explain intra-industry trade and differentiate it from inter-industry trade!

Answer 11

• Trade occurs within the car industry: intra-industry trade
• Does not reflect comparative advantage, rather product differentiation.
• Trade occurs between industries: inter-industry trade

Question 12

What can be possible motives for trade barriers?

Answer 12

• Infant-Industry Argument
• Protecting consumer
• Retaliation against unfair action of competitor countries
• National Security

Question 13

Name types of trade barriers.

Answer 13

• Tariffs (“ad valorem” or “specific”)

non-tariff

• Import quotas
• Voluntary export restraints
• Export Subsidies Non-tariff barriers
• Local content requirements
• Administrative policies

Question 14

What are the effects of a tariff?

Answer 14

• Creates disincentives to search for most efficient production processes
• Reduces the flexibility of the economy by locking in resources in “old” industries
• Increases costs for processing industries
• Administrative costs
• Encourages lobbying
• Danger of retaliation
• Consumers are the losers
• The protected industry is the winner
• Other industries are likely to be losers
• The government can be among the losers or among the winners
• It encourages lobbying
• It leads to negative effects in other countries
• It can lead to a trade war
• It sets a bad example for countries embarking on market economy strategies