Formulas and concepts Flashcards
Define trade creation
TRADE CREATION. - high-cost home production is replaced by imports from a lower cost trade partner (prompted by the elimination of trade barriers)
The replacement of expensive domestic production by cheaper imports from more efficient partner countries.
Define trade diversion
TRADE DIVERSION. - imports from more efficient third countries (non-member of CU/FTA) are replaced by imports from a less efficient trade partner (due to the discriminatory suppression of trade barriers –member countries do not face trade barriers, but non-member do so)
The increase in trade with a higher-cost producer due to the removal of tariffs is called trade diversion.
GDP per capita formula
GDP pr.capita= GDP/Population
Index number formula
The base year will have an index value of 100
index number = (Raw number) / (Base year raw number) * 100
Explain the problem of asymmetric shocks for the formation of a monetary union (currency area).
Events that have different economic effects on different parts of a given region, such as a shift in foreign demand to competing countries, or a sudden rise in wages in a particular country. When a country has its own currency, it can better respond to asymmetric shocks, for instance with devaluation of the currency.
Explain the economic effects of economic integration, distinguishing between allocation and accumulation effects. Hint: focus on economic intuition, no graphical analysis is required.
Economic integration is an arrangement among nations to reduce or eliminate trade barriers and the coordination of monetary and fiscal policies. Economic integration aims to reduce costs for both consumers and producers and to increase trade between the countries involved in the agreement.
The allocation effects become visible through the effect of level of income, level of employment, and the relative prices.
The accumulation effects are seen through growth rates of income, employment (especially in less developed economies) and prices.
Explain the main goal of the Treaty of Rome (1957). Briefly describe its main elements as well as its omitted elements, and consider their implications for the integration process ever since.
It set up the European Economic Community (EEC) which brought together 6 countries (Belgium, Germany, France, Italy, Luxembourg, and the Netherlands) to work towards integration and economic growth, through trade.
It created a common market based on the free movement of: • goods • people • services • capital.
