EU

Question 1

Advantages and disadvantages of EU membership

Answer 1

Free trade amongst members and benefits of this - trade creation
Easier to negotiate trade deals as a large bloc because other countries will be very interested in striking trade deals with the EU, which accounts for 16% of nominal global GDP
Revenue from external tariffs can be shared between members
Protects against trade deflection - when countries move goods between countries, selling originally to the country with lowest tariff rate
Cons:
Lack of sovereignty - can’t negotiate separate trade deals in their best interests
Hard to subsidise
Risks of trade diversion

Question 2

Levels of economic integration in order lowest to highest

Answer 2

Independent economy
Free trade area - no tariffs
Customs union - removal of tariff barriers and common external tariff
Common single market - free movement of goods, people, capital and services
Monetary Union - shared currency
Fiscal union - harmonise tax rates and public sector spending

Question 3

Is the continuous expansion of the EU good for existing and new members

Answer 3

Existing:
More trade creation
Less trade deflection
However additional costs resulting from erecting new borders

New:
Just the usual pros and cons really

Question 4

Advantages and disadvantages of being in eurozone

Answer 4

Greater ease of price comparison
Lower transaction costs - no cost in changing currency, so tourism up
Greater certainty —> greater investment as ERs less volatile
Cons:
Loss of monetary sovereignty- can’t set IRs
Difficult to deal with economic divergence between members ie countries in different stage of business cycle
Lack of ER flexibility between members - if you have higher inflation, your goods become less price competitive. Issue for Spain, Portugal, Greece

Question 6

To what extent is the EMU an optimal currency area

Answer 6

Labour and capital mobility are there in EMU. Does have a central bank
Lacks a risk sharing system where developed countries help developing ones, which is very unlikely to happen due to each to their own
Degree of economic convergence is low because many very different economies

Question 7

What is an optimal currency area

Answer 7

A geographical region in which it would maximise economic efficiency to have the entire region share a single currency. Relies on:
Labour mobility
Capital mobility
Risk sharing system
Degree of economic convergence