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ECON1013 Economic Integration > Product and Factor Market Integration > Flashcards

Product and Factor Market Integration Flashcards

1
Q

Examples of challenges of economic disintegration

A

Brexit

US-China trade war

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2
Q

Economic integration

A

Where countries remove barriers of restrictions on trade, investment and migration

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3
Q

What happens to prices of labour, capital and products when there is economic integration?

A

All prices converge but there are still some differences due to trade costs

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4
Q

Negative integration

A

Removing barriers e.g tariffs

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5
Q

Positive integration

A

Coordination and harmonising of government policies e.g banking regulations

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6
Q

How can negative integration be good?

A

Bigger markets lead to increased competition, specialisation, economies of scale. This increases efficiency as well as wider consumer choice

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7
Q

How can positive integration be good?

A

•all notional policies have spillover effects on neighbours so without cooperation of policies it is economically inefficient

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8
Q

What is a downside of positive integration?

A

It gives up some National sovereignty

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9
Q

Global integration

A

Economic integration all across the world

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10
Q

Negatives of global institutions

A

They are slow to act due to diversify of views, this can be vital in emergencies

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11
Q

Positives of global institutions

A

They avoid discrimination and have a wider impact

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12
Q

Regional integration

A

Economic integration in one area e.g EU

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13
Q

Positives of regional institutions

A

Act quicker and more harmoniously because members are more similar

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14
Q

Negatives of regional integration

A

They discriminate against some countries joining

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15
Q

Purpose of World Trade Organisation (WTO)

A
  • create world trade rules
  • host periodic negotiations to reduce trade barriers
  • have a court like system for make sure all countries obey rules
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16
Q

What does IMF stand for?

A

International Monetary Fund

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17
Q

What does the International Monetary Fund IMF do?

A
  • monitor exchange rates/ short term capital flows

* work in cooperation with all 190 countries to foster economic growth

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18
Q

What does the world bank do?

A
  • provide financing, advice and research to developing countries
  • monitor long term capital flows
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19
Q

What are the four levels of regional integration

A
  1. Free trade area
  2. Customs union
  3. Common market
  4. Economic union
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20
Q

Free trade area

A

An area where there are no tariffs and quotas on international trade members. All members outside area are subject to tariffs. E.g NAFTA

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21
Q

Customs union

A

A type of trade bloc which is made of a free trade area with a common external tariff

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22
Q

Common market

A

A trade bloc with a free trade area, a common external tariff and no restrictions on factor movements

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23
Q

Economic union

A

A trade bloc with a free trade area, a common external tariff, no restrictions on factor movements and some harmonisation of national policies e.g EU

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24
Q

Order of treaties and acts to form EU

A
  • Treaty of Rome 1958
  • Customs union by 1970
  • Single European act 1987
  • Treaty on European Union 1993
  • Treaty of Lisbon 2009
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25
Q

Import tax (tariff)

A

A tax on imports which increases the price of the product and therefore makes domestic produce relatively cheaper. Domestic consumers pay this tax

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26
Q

Incentives for governments to use tariffs

A
  • help domestic producers

* increased tax revenue from tariffs

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27
Q

Consequences of a customs union on trade

A

+should increase trade between member countries
+imports are cheaper
+could cause trade creation
-trade could be diverted away from other non members (trade diversion)

28
Q

Jacob Viner model assumptions of customs unions

A
  1. There are 3 countries (home/partner/rest of world)
  2. There is one good
  3. There is a given supply price unaffected by quantity
  4. The demand for the good in home country is constant
  5. The focus is on cost of supply, the lower the better
29
Q

How is trade creation beneficial

A
  • Production is switched to a lower cost source
  • consumers pay a lower price
  • there is no less revenue to the government
30
Q

In the example of trade creation through the formation of a customs union what further assumptions are needed?

A
  • workers and machines are flexible and can be switched to new jobs in the export industry
  • standard CU theory assumes perfect comp- no adjustment costs
  • gains are permanent, costs are temporary
31
Q

How is trade diversion harmful?

A
  • production moves to a higher cost source (inefficient)
  • government loses revenue
  • the tax loss is greater than the gained consumer benefit
32
Q

What are the assumptions for the more flexible model on the formation of customs unions.

A
  1. There is one market providing a homogeneous good

2. There is perfect comp hence supply curve reflects opportunity cost of resources in next best use

33
Q

What does customs union theory predict?

A
  • increased trade between member countries
  • increase specialisation in production
  • a one off increase in output and income as resources move to efficient uses
34
Q

What were the results when Gasiorek, Smith and Venables (2002) hypothetically reimposed tariffs on the UK from the EU

A
  • by 1985 trade with the EU had increased mostly by TC
  • small TD
  • main gain was increased competition and efficiency
35
Q

How did adjustment issues of joining a CU affect countries?

A

In general there weren’t many job losses due to specialisation. Balassa 1975 actually found Germany and France became more similar not more different after joining EU

36
Q

Intra industry trade (IIT)

A

When countries simultaneously import and export products of the same industry (e.g UK exporting minis and importing Mercedes)

37
Q

Grubel Lloyd index

A

A measure of how similar a country’s esport products are to its import products 0%= completely different 100%= identical

38
Q

What did Balassa find referring to the Grubel Lloyd index?

A

1958-1970
Italy increased 42%-59%
France increased 61%-73%

39
Q

Why does IIT occur?

A
  • most products are branded
  • this gives consumers more choice
  • but more varieties add to costs/reduce scale economies
  • under monopolistic competition, the market balanced more choice against more economies of scale
40
Q

Single market

A

A type of trade bloc in which most trade barriers have been removed so there are no international borders or other regulatory obstacles to the free movement of goods and services

41
Q

Types of Non tariff barriers

A

Barriers to trade which aren’t tariffs
•physical barriers: border control
•tax barriers: VAT organised nationally
•technical barriers for goods: national rules
•gov ‘buy national’ measures where the gov favour domestic goods and services

42
Q

What are the potential gains of a single market compared to a customs union

A

In CU there are still non tariff barriers which prevent trade and leave countries fragmented. The removal of NTB could increase GDP by 5% (Cecchini)

43
Q

What are the 3 main sources of gain for a single market?

A
  1. Standard cost savings and specialisation from the elimination of frontier controls and removal of other NTB
  2. Economies of scale
  3. Increased cross boarder competition, raised efficiency and innovation
44
Q

Initial assumptions of model analysis of NTB removal

A
  1. Partial equilibrium, ignore impacts on other markets
  2. Two large countries, ignore rest of world
  3. Start with a NTB large enough to make cross border trade unprofitable
  4. Perfect competition
  5. Instant transition, no adjustment cost
45
Q

What happened when the single market was formed?

A
  1. End intra EU frontier controls
  2. Harmonise technical barriers- now one EU standard of mutual recognition of each others standards
  3. End ‘discriminatory public procurement’- all state bodies to buy cheapest source
  4. Streamline patent production- there is only one parent needed €32k down to €6.5k
46
Q

What has been the impact of the single market on GDP?

A
  • 2.6% gain on top of 2.5% across the board (Harrison et al 1994)
  • one gain of 1.8% compared with prediction of 5% (European commission)
  • however these studies ignore dynamic effects so the potential for further gains is huge
47
Q

Why do we need a WTO?

A

It is a powerful device for raising living standards
•specialisation according to comparative advantage
•economies of scale
•competition induced efficiency

48
Q

How does WTO help agree rules and sanctions

A
  • it has a dispute settlement system
  • it has expert review and recommendation
  • sanction of higher trade barriers against offenders
49
Q

WTO principles

A
  1. Non discrimination
  2. Transparency
  3. Reduce trade barriers progressively
  4. Multilateral negotiation
  5. Fair trade
  6. Special greatly for developing countries
50
Q

Successes of WTO

A
  • it helped trade to grow at 6% per year
  • it is a respected institution, helps settle disputes
  • helped avoid increased protectionism in economic crisis
51
Q

Failures of WTO

A
  • some rules are abused e.g anti dumping
  • failed to get significant reform in agriculture or to make much progress on services
  • rapid increase in bilateral agreements threaten to sideline WTO
  • massive trade imbalances which impact jobs
  • worries about recent slowdown in trade growth
52
Q

MVP

A

Marginal value productivity of labour = the amount of output created by each additional worker

53
Q

Assumptions for a theory of wage rates in a common market

A
  1. Goods are produced by combining labour and capital
  2. Workers have identical skills
  3. Capital is fixed
  4. MVP has decreasing returns
  5. There is perfect competition
54
Q

What occurs if there is a common market for labour

A

Workers migrate to where there are higher wages until the wages level out so in theory wages should converge among all countries in the common market

55
Q

Reservations to theory of wage rates model

A
  • in reality there isn’t perfect wage flexibility- min wage
  • in reality there will be unemployment
  • capital isn’t actually fixed
  • some workers are more skilled than others
  • there isn’t free movement
56
Q

What are other ways of converting wages?

A

Free movement of capital, firms relocate to areas with low wages
Free trade- low wage countries could export goods which require more labour so there would be increased demand for labour and wage would rise

57
Q

How does regional integration affect the steady state limit growth?

A
  1. Baldwin medium term growth bonus
    Integration causes a one off gain in output, so there is an increase in output and capital
  2. Integration raises technology
    Increased imports of machinery with latest technology, bigger markets give greater stimulus for R&D, movement of people encourage circulation of new ideas, MNC’s spread technology
58
Q

How does NAFTA stop potential job losses in USA?

A

They implement environmental conditions to prevent new factories in Mexico combining US productivity with Mexico wages and they contain provisions on labour (NAALC)

59
Q

Trade deflection

A

When an external country exports into a FTA but only into the country with the lowest tariff who then exports it to the other countries with higher tariffs

60
Q

How is trade deflection prevented in NAFTA?

A

Only goods wholly or largely made in the FTA can criss international borders tariff free (rules of origins ROO)

61
Q

Impact of NAFTA on trade

A
  • expected to stimulate intra NAFTA trade x3 between 1993-2011
  • Canada and Mexico are two largest export destinations for US and 2nd and 3rd import suppliers
  • Canada’s share of US imports has declined, Mexico’s share has increased
62
Q

How much of the growth is due to NAFTA?

A
  1. Romali 2005 increased share of Mexico in US markets was greatest where tariff cuts were greatest
  2. Burfisher et al (2001) found a small increase in net trade and little trade diversion
  3. Kehoe et al (2002) found US trade diversion in textiles, clothing and footwear
  4. US congressional Budget Office (2003) found that the NAFTA effect was dwarfed by other factors such as increased technology
63
Q

What was NAFTA’s impact on American jobs and wages?

A
  • Most studies find NAFTA effect on trade and employment is small. The best models suggest there is even a slight gain in jobs.
  • In theory there is a reduction in wages of unskilled workers due to factor price equalisation
  • US research funds technological change has had main change in manufacturing jobs
64
Q

NAFTA impact on Mexico

A
  • +40% in income per person since 1994
  • Mexico has attracted rapid expansion in US investment (FDI $15bn to $90bn)
  • initially increase in US-M labour intensive manufacturing firms
  • now manufacturing is advanced, accelerated decline in small firms
  • NAFTA has been the key driver of Mexico’s transformation over the last 20 years (Taylor 2012)
65
Q

What are the NAFTA labour market provisions

A
  • partners must apply international labour standards
  • partners must enforce own labour rules
  • sanctions regarding min wage, child labour, occupational health and safety
66
Q

Conclusions of NAFTA

A
  1. NAFTA only has a small effect on the evolution of trade and employment in USA
  2. Globalisation had technological change probably played a bigger role in decline of manufacturing jobs
  3. NAFTA may have contributed to growing inequality between skilled and unskilled workers
  4. US competitiveness may have risen
67
Q

How is USMCA different to NAFTA?

A
  • ROO, automobiles must have 75% of components made in area for free trade, it was 62.5%
  • 40-45% of automobile parts made by workers earning > $16 per hour
  • Mexico provide workers the right go union representation, more labour protections for migrant workers
  • the agreement will expire after 16 years
  • overall the differences will only slightly benefit US firms

ECON1013 Economic Integration (2 decks)

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