Macro 30 trade policy and integration Flashcards
Why do developed countries trade mostly between themselves?
- Trade blocs.
- Contracts.
Why is the intra-regional trade within africa low?
- Poor infrastructure.
- Protectionism.
- Poor organisation and systems.
Who does the UK trade most with?
EU and USA.
Define economic integration?
Agreement between countries in a geographic region to reduce/remove protectionism and increase trade.
What are the 3 types of trade agreements?
- Unilateral - One sided contract where a country lowers/loosens protectionist barriers.
- Bilateral - Two countries agree to have equal trade and loosen protectionism.
- Multilateral - Many countries have an agreement to loosen protectionism.
What is the first stage of economic integration?
FREE TRADE AREAS - When a group of countries agree to not use protectionist measures.
- Features include no tariffs or quotas.
What are some examples of free trade areas?
- USMCA.
- European free trade association (swiz, iceland, norway, lichtenstein).
- ASEAN (malay, sing, viet, thai, philly)
What is the second stage of economic integration?
CUSTOMS UNIONS - A group of countries agree to remove protectionism but also impose a common external tariff.
What is a common external tariff?
Anything that comes from outside must have the same tariff - prevents arbitrage.
Why does a customs union benefit countries?
Because trade is created between countries (trade creation).
what are the benefits of trade creation?
- More exports - increased demand for domestic goods - injection - more profits for firms - more investment - more growth.
- Animal spirits improve because there’s a sign of economic stability.
- Import raw materials - drive down costs - lowering prices - more demand - more tax revenue.
- Out is larger due to a bigger market - fixed costs are spread out - average costs fall and bulk buying causes variable cost to fall too.
Draw and explain a trade creation diagram, giving any assumptions made?
UK joins the EU. Tariffs are removed so price level falls. Consumer surplus has increased by area 1234. Govt revenue falls and turns into consumer surplus. Contraction along the supply curve because firms leave the market. Extension along the demand curve because more people can afford the good.
ASSUMPTIONS:
- Assumes extension along demand curve because decisions are based on price only.
- Assumes UK firms will leave the market.
- Assumes that countries are only exporting and not importing.
define trade diversion?
Happens when members of a customs union import from a less efficient member within the union instead of a more efficient member outside the union.
Draw and explain a trade diversion diagram?
Assume Uk was not in the EU, then joined.
UK has free trade with India and initial imports are shown by Q2-Q1. They then joined the EU and so had to place a common external tariff on indian goods, leading to price moving from P1 to P2. Then price falls as EU goods become cheaper, but not as cheap as the indian goods, shown by P2 to P3.
Welfare:
Area 1 - scarce resources not being allocated efficiently.
Area 2 -
Area 3 - loss of govt revenue.
What is the third stage of economic integration?
COMMON/SINGLE MARKETS.
No protectionism, common external tariffs, and free movement of labour.
- Extension from just tangible goods to now intangible goods.
- There are common sets of regulations about product standards and laws about how firms are allowed to operate, like health and safety laws.
