7) Economic intergration

Question 1

What is economic integration

Answer 1

An agreement among countries in a geographic region to reduce/ remove trade barriers of goods and services and factors of production, co-ordinaiting monetary, trade and fiscal polices to some extent too

Question 2

What is a free trade area eg NAFTA

Answer 2

An area where internal trade tariffs/ quotas are removed/ reduced across most G+S

Question 3

What is a customs union??

Answer 3

Encompasses the benefits of a free trade area, but also has unified tariffs on the trade blocs external border eg EU when it formed

Question 4

What is a single market??

Answer 4

Encompasses both customs union and FTA benefits, but also has universal regulation on product regulation as well as freedom of movement of factors of production like labour and capital.

Question 5

What is a monetary union

Answer 5

Trade bloc composed of a single market with a single currency eg the Eurozone

Question 6

What is trade creation and how does it work?

Answer 6

The increase in economic welfare from joining an FTA

• Lower price for consumer (opposite of tariff diagram) due to tariff free trade, at the expense of domestic producer surplus
• increases imports

Question 7

What is trade diversion and how does it occur?

Answer 7

The shift in production from a Low cost country to a high cost country

• tariff diagram with 3 lines; low cost country no tariff, High cost FTA country no tariff, low cost country with tariff
• the cost of importing goods from the low cost country with a tariff is relatively more expensive than the high cost country in the FTA with no tariff, so consumer prices are increased, but not to the level of the low cost country with a tariff

Question 8

Advantages of EU membership

Answer 8

• allocation of resources to comparative advantage lowers costs and increases output
• higher labour and FOP availability
• more consumer choice
• lower import costs (trade creation) due to no tariffs
• more export opportunities especially for developing economies

Question 9

Disadvantages of EU membership

Answer 9

• trade diversion
• extra budgetary cost as businesses spend money to comply with new regulations
• loss of Jobs in sectors where there are more efficient workers operating in other countries

Question 10

Benefits of a monetary union (eurozone)

Answer 10

• lower transaction costs
• easier to compare PPP between member countries
• cheaper to borrow money for government
• better opportunities and improves prospect of attracting foreign investors as the currency may be relatively more stable due to its widespread use
• increased business confidence

Question 11

Problems with joining a monetary union

Answer 11

• lose control of monetary policy (loss of economic sovereignty)
• partial loss of fiscal independence
• short run inflation as everyone anticipates prices to rise so they increase consumption (demand pull)

Question 12

Reasons for the UK joining the Eurozone

Answer 12

• FDI into the Eurozone should increase because of the strength and the size of the UK economy
• reduced transaction costs and increases in trade due to not having to change currencies, could improve standards of living and balance of payments
• fiscal policy tools still available

Question 13

Reasons for the UK not joining the Eurozone

Answer 13

• loss of monetary policy tools; massive goal of stable prices from the ECB and so this may not be beneficial to the UK if they suffer from other problems
• structural unemployment from people not being able to compete with existing labour in the EU
• global financial crisis saw eurozone members see falls in real GDP, weak consumer spending and capital investment, as well as high unemployment