ECON 4.1+4.4: Trade and Economic Integration

Question 1

What is the progression of economic integration? What are examples of each stage?

Answer 1

Preferential Trade Agreement - Free Trade Area/Agreement - Customs Union - Common Market - Monetary Union - Complete Economic Integration

Question 2

What is a preferential trade agreement?

Answer 2

An agreement reducing trade barriers between one (bilateral) or more countries (multilateral).

Question 3

What is a free trade area/agreement?

Answer 3

An area/agreement where there are NO trade barriers among member countries, but members are allowed to have different external barriers with non-members.

Question 4

What is a customs union?

Answer 4

A union where member countries have no trade barriers among member countries AND must also have common external barriers with non-members.

Question 5

What is a common market?

Answer 5

A union in which member countries have no trade barriers among member countries and must also have common external barriers with non-members. They must ALSO allow for the free movement of the factors of production within the common market.

Question 6

What is a monetary union?

Answer 6

A union in which member countries have no trade barriers among member countries and must also have common external barriers with non-members. They must also allow for the free movement of the factors of production within the common market AND use a common currency.

Question 7

What is complete economic integration?

Answer 7

Close harmonization of fiscal and monetary policies between member countries. (A union in which member countries have no trade barriers among member countries and must also have common external barriers with non-members. They must also allow for the free movement of the factors of production within the common market AND use a common currency.)

Question 8

Advantages to being in a trading bloc

Answer 8

• Trade creation (HL)
• Access to larger markets & economies of scale
• Greater employment opportunities (movement of labour)
• Strong bargaining power in multilateral negotiations (ex. CAFTA-DR negotiating with US)
• Greater political stability and co-operation via interdependence

Question 9

Disadvantages of being in a trading bloc

Answer 9

• Trade diversion (HL)
• Loss of sovereignty
• Challenges to multilateral trade negotiations - more cultures, political systems and time zones involved add complexity compared to bilateral agreements.

Question 10

Advantages to sharing a common currency

Answer 10

• Easier to engage in cross border trade
• Stimulates inward investment (tourism, financial services etc.)
• Increases comparison of prices
• Can improve labour mobility
• Reduces currency risks that smaller countries might have faced absent a common currency

Question 11

Disadvantages of sharing a common currency

Answer 11

• Can no longer rely on currency devaluation as part of monetary policy
• In the EU, interest rates are set for all countries on average, no longer just one.
• Therefore, a common interest rate might create divergence in living standards between countries if their underlying fundamentals are very different.
• Deeper integration has benefits but also risks, for example if there is a recession in the economy of a major trading partner.
• Countries may be on the hook to bail out member countries as economies are more integrated (fiscal policy).