26. Economic Integration Flashcards
What is Economic Integration?
Economic integration is an agreement among countries in a geographic region to reduce and ultimately remove, tariff and non tariff barriers to the free flow of goods or services and factors of production among each others.
What are the 4 types of Integration?
- Free-trade areas e.g. EFTA NAFTA (no tariffs between member countries)
- Customs unions e.g. original EEC (free trade area with common external tariff- e.g all agree same restrictions on Chinese imports)
- Single markets e.g. EU single market- free movement of goods, services, capital and labour between members
- Monetary and economic unions: is where two or more states share the same currency e.g the Eurozone and what SNP want with England if Scotland becomes independent
What is a Free trade area?
A free trade area (FTA) is formed when at least two states partially or fully abolish custom tariffs on their inner border.
E.G NAFTA
What is a Custom Union?
A customs union introduces unified tariffs on the exterior borders of the union (common external tariffs). A customs union is a type of trade bloc which is composed of a free trade area with a common external tariff. The participant countries set up common external trade policy.
What is a Single (common) Market?
A common market is a type of trade bloc which is composed of a customs union with common policies on product regulation, and freedom of movement of the factors of production (capital and labour) and of enterprise. The goal is that the movement of capital, labour, goods, and services between the members is as easy as within them.
What is an economic and monetary union?
An economic and monetary union is a type of trade bloc which is composed of a single market with a common currency.
Example: Economic and Monetary Union of the European Union.
This greatly restricts the ability of governments to manage their own economy as they are required to converge with other economies in the union.
What is Trade Creation?
Trade creation refers to the increase in economic welfare from joining a free trade area, such as a customs union.
Trade creation will occur when there is a reduction in tariff barriers, leading to lower prices. This switch to lower cost producers will lead to an increase in consumer surplus and economic welfare.
What is Trade Diversion?
Trade diversion occurs when tariff agreements cause imports to shift from low cost countries to higher cost countries. Trade diversion is considered undesirable because it concentrates production in countries with a higher opportunity cost and lower comparative advantage.
