4.4 Economic Integration Flashcards
What is economic integration
is a process through which countries coordinate and link their economic policies and decrease trade barriers
6 stages of economic integration
- Preferential trading areas
- Free trade areas
- Customs Union
- Common Markets
- monetary union
- Complete economic integration
What is a preferential trade agreement
An agreement between two or more countries to lower trade barriers on particular products in trade between each other
Types if preferential trade agreements and define them
Bilateral trade agreement - agreement made by two countries
Multilateral trade agreement - agreement between many countries
Regional trade agreements - agreements between a group of countries within a geographical region
What is trade liberalization
Free trade by reducing or eliminating trade barriers between members
What is a trading bloc
Group of countries that have agreed to reduce trade barriers for the purpose of encouraging free or freer trade
Types of trading blocs
Free trade area
Customs union
Common market
What is free trade area
Consists of a group of countries that agree to gradually eliminate trade barriers between themselves
What is a customs union
Consists of a group of countries that fulfills the requirements of a free trade area and in addition adopts a common policy towards all non-member countries (agree to have common barriers reducing trade outside of the customs union)
What is a common market
An even higher degree of economic integration
The further elimination of remaining trade barriers; continue to have a common external policy and in addition, agree to eliminate all restrictions on movements of any factos of production within them
Advantages of trading blocs
Trade creation
greater access to markets offer potential for economies of scales
with freedom of labour, there are greater employment opportunities
membership in a trading bloc may allow for stronger bargaining power in multilateral negotiations
greater political stability and cooperation
Explain trade creation
occurs when entry of a country into a customs union leads to the
production of a good or service transferring from a high–cost producer to a low–cost producer
Disadvantages of trade unions
Trade diversion
loss of sovereignty
challenge to multilateral trading negotiations
Explain trade diversion
occur if there is a trade bloc which is also a customs union. This has the opposite effect, and transfers production from a low–cost producer onto a high–cost producer
What is a monetary union
Occurs when the member countries of a common market adopt a common currency and a common central bank responsible for monetary policy
Advantages of monetary policy
eliminates exchange rate risk and uncertainty
Price transparency
Eliminates transaction costs
Higher level of inward investment - outsiders with common currency (more security)
Low rates of inflation give rise to low interest rates more investment, increased output - monetary union takes away ability to change exchange rate to manipulate inflation ; keeping inflationary pressure low is now a key aim , fixes problems without changing exchange rates
Disadvantages of monetary policy
loss of domestic monetary policy as an instrument of economic policy
Monetary policy perused by single central bank will impact differently on each member country, deepening on its own particular circumstances
Involves loss of exchange rate as a mechanism for adjustment
What is the WTO
World trade organization - an organization for liberalizing trade
Objectives and functions of WTO
It administers trade agreements
It provides a place for trade negotiations
It handles trade disputes
It monitors national trade policies
It provides assistance and training for developing countries
Facilitates co-operation with other international organizations
Factors affecting the influence of the WTO
difficulties of reaching agreement on services/ primary products
unequal bargaining power of members
Ignore environmental and labour issues
Accused of promoting trade rules that do not favor developing countries
