W10 Economic Integration

Question 1

Forms of economic integration

Answer 1

1. Preferential Trade Agreement (PTA)
2. Free Trade Area (FTA)
3. Customs Union
4. Common Market
5. Economic Union

Question 2

what is PTA?

Answer 2

Member countries agree to set lower barriers to trade within the group

Question 3

what is FTA?

Answer 3

Area where each country is allowed to mantain its own barriers to trade with non-members

Question 4

what are rules of origin?

Answer 4

the criteria needed to determine the national source of a product

Question 5

what is a customs union?

Answer 5

there are no barriers between members of the union but they mantain a common external tariff on trade with non-members

e.g. Republic of Ireland and NI

Question 6

what is trade creation? benefit?

Answer 6

when domestic production in a member nation is replaced with lower-cost imports from another member.

Benefit: increased welfare for members as nations specialise in CAs

Question 7

what is trade diversion?

Answer 7

Diverts sources of imports from lower to higher cost suppliers (welfare decreases)

Question 8

Reasons why trade creation > trade diversion

Answer 8

• initial tariff is very high
• greater probability that customs unions will create trade among members
• cost difference between goods purchased with and outside the union is relatively small

Question 9

3 benefits of a customs union

Answer 9

increased competition: when a customs union is formed and trade barriers are eliminated, producers in each nation must become more efficient to have CA within the union.

economies of scale: after customs union is formed and trade barriers are eliminated, significant EoS can be achieved

stimulus to investment: a possible response to take advantage of enlarged market and meet the increased competition