3.4 Economic integration

Question 1

What is economic integration?

Answer 1

Economic co-operation between countries and co-ordination of their economic policies, leading to increased economic links between them.

Question 2

What is a preferential trade agreement (PTA)?

Answer 2

An agreement between two or more countries to lower trade barriers between each other on particular goods and services.

Question 3

What are the three types of PTAs?

Answer 3

• Bilateral trade agreements
• Multilateral trade agreements
• Regional trade agreements

Question 4

What is a trade bloc?

Answer 4

A group of countries that have agreed to reduce tariffs and other barriers for the purposes of free trade.

Question 5

What is a free trade area?

Examples?

Answer 5

A group of countries that have agreed to gradually eliminate trade barriers between each other.

Examples: USMCA, ASEAN, SAARC

Question 6

What is a customs union?

Examples?

Answer 6

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

Question 7

What is a common market?

Examples?

Answer 7

A group of countries that agree to the free movement of goods, services, labour and capital.

Examples: the EU Single Market

Question 8

What is a full economic union?

Examples?

Answer 8

A trading bloc that is both a common market and a customs union.

Example: The European Union

Question 9

What is a monetary union?

Examples?

Answer 9

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)

Question 10

What is a monetary and fiscal union?

Examples?

Answer 10

A monetary union that agrees to harmonize tax rates, public spending, borrowing, and a budget.

[no existing examples]

Question 11

What is complete economic integration?

Examples?

Answer 11

Harmonisation of all policies, rates and economic trade rules.

[no existing examples]

Question 12

What is a bilateral trade agreement?

Answer 12

A PTA between to two countries/blocs. E.g. CETA (Canada and the EU)

Question 13

What is a multilateral trade agreement?

Answer 13

A PTA between more than 2 countries/blocs e.g. WTO

Question 14

What is a regional trade agreement?

Answer 14

A multilateral trade agreement in a specific geographical region e.g. USMCA, ASEAN

Question 15

What are the advantages of trading blocs?

(6)

Answer 15

• 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

Question 16

What are the disadvantages of trading blocs?

(3)

Answer 16

• 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

Question 17

What is trade creation?

Answer 17

A situation where higher-cost producers are replaced by lower-cost producers.

Question 18

What is trade diversion?

Answer 18

A situation when lower-cost imports are replaced by higher-cost imports from a trading bloc.

Question 19

What are “dynamic” costs and benefits of a customs union?

Answer 19

They account for shifts in demand & supply in the long term following membership of a customs union.

Question 20

What are “static” costs and benefits of a customs union?

Answer 20

Assumes static demand & supply curves that are unaffected by changes in the trading patterns due to membership of a customs union.

Question 21

What costs and benefits do trade creation and trade diversion?

Answer 21

Short term “static” costs and benefits.

Question 22

How would you show trade creation on a graph?

Answer 22

Question 23

How would you show trade diversion on a graph?

Answer 23

Question 24

When would it be beneficial to join a trade bloc?

Answer 24

When the trade creation > trade diversion

Question 25

When would it not be beneficial to join a trading bloc?

Answer 25

When trade creation < trade diversion

Question 26

State the dynamic costs and benefits of a customs union?

Answer 26

+ Internal and external economies of scale

+ Increased competition

• Diseconomies of scale
• Increased emigration

Question 27

What are the possible advantages of a monetary union?

(5)

Answer 27

• 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

Question 28

What are the possible disadvantages of a monetary union?

(4)

Answer 28

• 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.

Question 29

What is an optimum currency area (OCA)?

Answer 29

Mundell’s work on optimum currency areas concluded that monetary unions are likely to be more successful when the following conditions are met:

1. there is greater mobility of capital and labour resources
2. there is close co-operation or co-ordination of fiscal policies, or there is an OCA-wide fiscal authority which determines fiscal policy
3. there is greater synchronisation of business cycle phases among members (they experience busts and booms at the same time)