European Union

Question 1

Define European Union

Answer 1

The European Union is a unique partnership between 27 European countries, known as Member States, or EU countries. Together they cover much of the European continent.

Question 2

Define monetary union

Answer 2

This is a monetary union. Members of a monetary union share the same currency. This is more economically integrated than a customs union and free trade area.

Question 3

What monetary policy is formed when a monetary union is formed

Answer 3

A common central monetary policy is established when a monetary union is formed. The single European currency, the Euro, was implemented in 1999 to form the Eurozone.

Question 4

What is special with interest rates in monetary unions

Answer 4

Monetary unions use the same interest rate. The Euro, for example, floats against the US Dollar and the Pound Sterling.

Question 5

What are the 4 rules a country must follow when in the EU

Answer 5

Member nations are required to control their government finances, so budget deficits cannot exceed 3% of GDP.

The other 3 rules you must follow to join the EU union is

• Gross National Debt must be below 6% of GDP
• Inflation must be below 1.5% of the three lowest inflation countries
• The average government bond yield must be below 2% of the yield of the countries with the lowest interest rates

Question 6

Define optimal currency area

Answer 6

Optimal currency area is a geographical region where it is thought a single currency would help to maximise welfare and enhance macroeconomic performance.

Member countries must respond similarly to external shocks or policy changes. There must be flexibility in product markets and labour markets to deal with shocks.

Question 7

What does the ECB do

Answer 7

The European Central Bank (ECB) manages the euro and implements EU economic & monetary policy.

Its main aim is to keep prices stable, thereby supporting economic growth and job creation.

Question 8

What problems do more economically developed countries have

Answer 8

MEDCs have the following economic problems

Slow economic growth

Income inequality

Aging population

Environmental sustainability

Question 9

What problems do less economically developed countries have

Answer 9

LEDCs have the following economic problems

Unemployment

Resource Curse

Poverty & income inequality

International trade (protectionism)

Question 10

What are the advantages of being a member of the EU

Answer 10

Reduced transaction costs for trade (no protectionist measures)

Increased economies of scale

Increased more efficient competition (More incentive to innovate)

Countries may benefit from more flexible labour markets.

Question 11

What are the disadvantages of being a member of the EU

Answer 11

Free movement of labour can cause friction and concerns about overpopulation and demands on housing.

Cost. The costs of EU membership to the UK is £15bn

Countries in south, e.g. Greece, Spain and Italy, have struggled to cope with Euro and common monetary policy.

Question 12

How has the EU recently expanded

Answer 12

In recent years the EU has expanded by adding many countries in Eastern Europe such as Turkey.

Question 13

What are the benefits of EUs expansion

Answer 13

• Larger trade area, provides new markets and potential for growth
• Free movement of labour makes labour markets more flexible
• New countries benefit from EU funds, such as regional aid, and agricultural funds – helping to promote economic development.
• Membership of the EU encourages international investors – both short term and long term.

Question 14

What are the Drawbacks of EUs expansion

Answer 14

• Harder to make agreements, with more countries
• Given different levels of economic development, new eastern countries have different attitudes to agricultural policy and laws of migration.
• Some existing EU members would feel poorer, not richer

Question 15

When do optimal currency areas work well

Answer 15

It tends to work well when

Countries within it are highly integrated with each other, for instance a high percentage of trade in goods and services is done with fellow currency union members.

Where each economy has a sufficiently flexible labour market to cope with external shocks.

Question 16

What are the advantages of using the EURO

Answer 16

• Lower transaction costs. If the UK joined the Euro, firms and tourists would not have to pay the cost of converting currencies
• Eliminate exchange rate fluctuations. If the exchange rates are fixed, firms can invest in export capacity with more confidence.
• Lower inflation. The ECB has a strong tradition of keeping inflation low.

Question 17

What are the disadvantages of using the EURO

Answer 17

• Countries will lose the ability to set interest rates.
• Lack of exchange rate flexibility. If the UK joined the Euro at an exchange rate that is too high, it would make UK exports uncompetitive
• Low inflation may conflict with other objectives. It is argued that the ECB is too concerned with low inflation

Question 18

Define Globalisation

Answer 18

Globalisation refers to the process of how national economies are becoming increasingly interdependent and integrated.

In practice, globalisation refers to the increased flow of labour, capital and trade between different countries

Question 19

What are the characteristics of globalisation

Answer 19

• Growth in free trade between countries
• Growth in movement of labour and capital across national borders
• Growth of multinational companies who operate around the world

Question 20

What are the causes of globalisation

Answer 20

• Growth of free trade. Trade is increasingly important to the global economy. Economies increasingly rely on importing raw materials and exporting goods.
• Multinational companies. There has been a growth in the number of multinational companies who have an influential cross-border presence.
• Technology. The development of technology, such as the internet, has helped improve communication and made it easier to connect to all corners of the world.
• Transport. Improved transport, especially air transport and shipping, has helped to make trade cheaper, and also made it easier for labour to move between different countries.

Question 21

What is the impact of globalisation

Answer 21

• Global trade cycles. Because economies are more closely linked, a recession in a major economy is likely to push many economies into recession.
• On the other hand, countries can benefit from growth in other countries through selling more exports.
• International co-operation. Globalisation has increased the importance of reaching global agreements.
• Countries are increasingly interdependent. China has become reliant on Africa for raw materials.

Question 22

What is the impact of globalisation on workers

Answer 22

• New opportunities. Some workers have benefited from globalisation, e.g. finding new opportunities to work abroad However, this migration has caused housing shortages.
• Wages. Globalisation has also helped equalise wages across the world. However, only a small percentage of workers in developing countries can benefit
• Foreign direct investment has created manufacturing jobs in developing countries. However, there has been criticism of firms, exploiting workers

Question 23

What is the impact of globalisation on businesses

Answer 23

• Uncompetitive domestic firms. Some local firms may be pushed out of business by large multinationals that can use economies of scale.
• Multinational companies have been able to reduce costs by outsourcing labour-intensive work to countries with low labour costs. However, there are also costs to outsourcing bad potential publicity
• Economies of scale. Global scale production has enabled greater economies of scale and lower costs, but some havent gained this

Question 24

Impact of globalisation on the environment

Answer 24

• Environmental costs. Globalisation has meant goods are increasingly imported from across the planet, rather than using local produce.
• globalisation enables firms to switch production to countries with weaker environmental legislation.
• Globalisation has slowly raised the importance of global co-operation to deal with environmental challenges.
• Some aspects of globalisation have helped to improve the environment, e.g. the media can make us more aware of the environmental costs

Question 25

What are the characteristics of an optimal currency area

Answer 25

Similar economic cycles

Good labour mobility