3.4 Economic integration Flashcards
What is economic integration?
Economic co-operation between countries and co-ordination of their economic policies, leading to increased economic links between them.
What is a preferential trade agreement (PTA)?
An agreement between two or more countries to lower trade barriers between each other on particular goods and services.
What are the three types of PTAs?
- Bilateral trade agreements
- Multilateral trade agreements
- Regional trade agreements
What is a trade bloc?
A group of countries that have agreed to reduce tariffs and other barriers for the purposes of free trade.
What is a free trade area?
Examples?
A group of countries that have agreed to gradually eliminate trade barriers between each other.
Examples: USMCA, ASEAN, SAARC
What is a customs union?
Examples?
A group of countries that fulfils the requirements of a free trade area adopts a common policy towards all member states.
Examples: EEC, SACUU, PARTA
What is a common market?
Examples?
A group of countries that agree to the free movement of goods, services, labour and capital.
Examples: the EU Single Market
What is a full economic union?
Examples?
A trading bloc that is both a common market and a customs union.
Example: The European Union
What is a monetary union?
Examples?
A trading block that is a common market, a customs union, and adopts a common currency and central bank.
Example: The Eurozone (European monetary union)
What is a monetary and fiscal union?
Examples?
A monetary union that agrees to harmonize tax rates, public spending, borrowing, and a budget.
[no existing examples]
What is complete economic integration?
Examples?
Harmonisation of all policies, rates and economic trade rules.
[no existing examples]
What is a bilateral trade agreement?
A PTA between to two countries/blocs. E.g. CETA (Canada and the EU)
What is a multilateral trade agreement?
A PTA between more than 2 countries/blocs e.g. WTO
What is a regional trade agreement?
A multilateral trade agreement in a specific geographical region e.g. USMCA, ASEAN
What are the advantages of trading blocs?
(6)
- Increased competition
- Expansion into larger markets (economies of scale)
- Lower prices for consumers & greater choice
- Increased investment
- Better use of factors of production, improved allocative efficiency
- Improved productive efficiency and economic growth
What are the disadvantages of trading blocs?
(3)
- Not the best way to achieve trade liberalisation (create discrimination between members and non-members)
- Undermines the role of the WTO
- Unequal distribution of gains and losses within the bloc
What is trade creation?
A situation where higher-cost producers are replaced by lower-cost producers.
What is trade diversion?
A situation when lower-cost imports are replaced by higher-cost imports from a trading bloc.
What are “dynamic” costs and benefits of a customs union?
They account for shifts in demand & supply in the long term following membership of a customs union.
What are “static” costs and benefits of a customs union?
Assumes static demand & supply curves that are unaffected by changes in the trading patterns due to membership of a customs union.
What costs and benefits do trade creation and trade diversion?
Short term “static” costs and benefits.
How would you show trade creation on a graph?
How would you show trade diversion on a graph?
When would it be beneficial to join a trade bloc?
When the trade creation > trade diversion
When would it not be beneficial to join a trading bloc?
When trade creation < trade diversion
State the dynamic costs and benefits of a customs union?
+ Internal and external economies of scale
+ Increased competition
- Diseconomies of scale
- Increased emigration
What are the possible advantages of a monetary union?
(5)
- A single currency eliminates exchange rate risk and uncertainty
- A single currency eliminates transaction costs
- A single currency encourages price transparency
- A single currency promotes a higher level of inward investment (into the bloc)
- Low rates of inflation give rise to low interest rates, more investment and increased output
What are the possible disadvantages of a monetary union?
(4)
- A single currency involves loss of exchange rates as a mechanism for adjustment
- A single currency involves loss of monetary policy as an instrument of economic policy (an individual economy)
- Fiscal policy is constrained by the convergence requirements
- Monetary policy pursed by the single central bank impacts differently on each member country, depending on its own particular circumstances.
What is an optimum currency area (OCA)?
Mundell’s work on optimum currency areas concluded that monetary unions are likely to be more successful when the following conditions are met:
- there is greater mobility of capital and labour resources
- there is close co-operation or co-ordination of fiscal policies, or there is an OCA-wide fiscal authority which determines fiscal policy
- there is greater synchronisation of business cycle phases among members (they experience busts and booms at the same time)
