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European Union Economics and International Institutions > Week two - economic integration > Flashcards

Week two - economic integration Flashcards

1
Q

what is economic integration?

A
  • elimination of economic frontiers between two or more countries
  • an economic frontier is any obstacle to the free movement of goods, services and production factors
  • not just international cooperation like WTO or IMF
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2
Q

what are the two steps of integration

A
  • negative integration: elimination of obstacles to the movement of goods, services and factors
  • positive integration: modifying existing instruments and institutions and creating new ones at the supranational level
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3
Q

what are some characteristics of a FTA

A
  • removal of tariffs and quotas for imports between members
  • national barriers to trade with third countries are maintained: prevents trade deflection
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4
Q

what is trade deflection

A

imports from an outside country entering the FTA through a low-tariff member country that re-exports them duty-free to high-tariff member countries

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5
Q

what is a customs union

A

FTA + common trade/commerical policy, including common external tariffs on trade with non-members

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6
Q

what is a common market

A

CU + free mobility of factors of production and removal of non-tariff barriers/restrictions

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7
Q

what is an economic and monetary union

A

CM + common monetary policy and single currency and macroeconomic policy coordination

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8
Q

What are the economic benefits of integration

A
  • greater specialisation
  • economies of scale
  • improvement in efficiency by increasing competition
  • better quality and more quantity of productive factors
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9
Q

what are the political benefits from integration

A
  • safeguarding peace in Europe
  • stabilising the system
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10
Q

define the static effects on allocative efficiency

A

changes in trade flows, production and consumption resulting from changes in relative prices caused by the changes in external production

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11
Q

what can the effects on trade be classified as

A
  • trade creation (production or consumption)
  • trade diversion
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12
Q

what is trade creation (production and consumption effect)

A

trade creation is the replacement of domestic production by cheaper imports from another country
- production effect: efficiency gains derived from the reduction of more expensive domestic production
- consumption effect: increase in consumption due to price reduction

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13
Q

what is trade diversion

A

replacement of cheaper imports from third countries by more expensive imports from a partner in the CU

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14
Q

in what conditions will a CU have positive effects

A

only when trade creation exceeds trade diversion

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15
Q

what assumptions do we make when modelling the benefits from forming a CU

A
  • country 1 is small (supply curves from the rest of the world are perfectly elastic)
  • P = Mc : perfect competition
  • homogenous product
  • constant returns to scale
  • no transport costs
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16
Q

graphs that show the formation of customs union

A

look are lecture slides 2

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17
Q

how to calculate trade diversion on a graph

A

replacement of imports from 3 (most efficient non-partner country) by imports from 2 (less efficinet partner country)

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18
Q

what does this relationship show, trade creation > trade diversion

A

a positive CU

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19
Q

what is the net welfare variation

A

the sum of:
- changes in consumer surplus
- changes in producer surplus
- changes in tariff revenue

20
Q

what conditions are held for there to be positive effects in CU

A

static effects for a country removing its tariffs in a CU are larger when:
- there is a higher PED and PES
- there’s a higher level of tariffz
- the higher the price difference between union partners
- the lower the price difference between union partners and the outside world
- CU size

21
Q

what are the two types of trade creation

A
  • interindustrial: differentiation productive structures, bigger adjustement costs
  • intraindustrial: approximation of productive structures, smaller adjustment costs
22
Q

what is meant by dynamic effects on growth

A

economic integration may influence the pattern and the rate of growth through more investment and factor mobility

23
Q

what are some dynamic effects that occur in the medium and long-run by the enhancement of competition in the enlarged market

A
  • increase in competition
  • market enlargement
  • firm reorganisation
24
Q

what happens when the number of producers in the CU increases

A
  • increase in competition
  • reduction in price differentials (not full levelling because there are transport/distribution costs and some goods/services are non-tradeable)
  • reduction in price margins (price = fixed costs + (1+a)(variable costs)), reducing ‘a’ allows for price reduction in order to remain competitive
  • internal efficiency improvement
  • non-price effects: improvements in production techniques and quality of products etc.
25
Q

what are the assumptions made when modelling a cost reduction due to economies of scale

A
  • two countries integrate
  • producing the same good
  • equal demand curve
  • different levels of efficiency in production
  • the most efficient country captures all the market
26
Q

the graph to show the dynamic effects of joining a customs union

A

check lecture notes 2, slide 45

27
Q

what does it show when the demand curves are not the same in the two countries when forming a customs union

A

a perverse specialisation effect where the country with a bigger demand captures all the market despite its lower efficiency

28
Q

what may firm reorganisation generate?

A
  • firm closures
  • an increase in the level of concentration (mergers) which might threaten competition
29
Q

summary of effects of customs union

A
  • gains from trade (comparative advantage)
  • more competition (efficiency and innovation)
  • market size effects (economies of scale)
    -fostered growth, competitiveness and productivity
30
Q

why does economic integration not yield equal benefits for everyone

A
  • different abilities to take advantage of static and dynamic effects
  • exploitation of integration benefits demands an adjustment process
  • there may be social and economic costs
31
Q

what is the white paper ‘completing the internal market’ and when was it written

A
  • 1985
  • it pointed out the main barriers (tax, physical, technical, public barriers)
32
Q

what are the two types of taxes

A

1) direct taxes: personal income tax, corporate tax etc.
2) indirect taxes: VAT and special taxes

33
Q

how can taxes act as a non-tariff barrier for a country wanting to form a customs union

A

if two countries produce the same good at different prices and different VAT levels, e.g. country A may have a lower original price but then after taxes have a higher price than country B

34
Q

how can tax barriers be removed

A

through harmonisation, i.e. all countries set the same tax rates

35
Q

why is harmonisation not possible

A

because member states keep fiscal sovereignty

36
Q

what was the EU’s three step strategy concerning VAT

A

1) introduction of VAT in all member states (1970)
2) harmonised definition of tax base (1977)
3) harmonisation of tax rates to proceed to origin-based taxes in 1977 (postponed indefinitely)

37
Q

what is an alternative to the unrealistic strategy of harmonisation

A
  • allow countries to keep national tax rates through setting a threshold and taxing goods where they are consumed at the destination (destination-based taxes)
  • however this creates a physical barrier because adjustments will need to be made to enable checks/controls at the border
38
Q

why was harmonisation never considered

A
  • impossible to establish one single rate for every good
39
Q

what problems do physical barriers present

A
  • frontier delays
  • tax adjustments
  • health regulations
  • transport licensing
    costs:
  • indirect: consumers
  • direct: importing/exporting firms
40
Q

what did the removement of the 1993 (SEA) border controls demand

A
  • new VAT return system
  • harmonisation of basic health and safety regulations
  • principle of mutual recognition and new system for collecting data
41
Q

what are the technical barriers

A
  • different technical regulations in the production of similar goods, e.g. technical standards or security conditions for production
42
Q

to what extent can we harmonise technical barriers

A
  • only essential requirements for health and security are harmonised
  • principle of mutual recognisiton rules for the rest
43
Q

why is the integration of services much slower than the integration of goods

A

the treaty of Rome acknowledged the needs to liberalise services including two options:
- temporary: freedom to provide services in another member state
- permanent: freedom of establishment for providers in another member state

44
Q

what are the four types of labour mobility in the EU

A
  • long-term mobility
  • cross-border works (workers reading in one member state and working in another)
  • posted works (employees sent to carry out a service in another member state on a temporary base)
  • return mobility
45
Q

what are the effects of free movement of labour

A
  • no drastic change in labour reallocation
  • no drastic convergence in wages and unemployment
  • strong migrant flows from third non-EU countries
46
Q

contents of the competition policy

A
  • prohibition of collusive agreements
  • prohibition of abusing dominant position (to squeeze out smaller competitors)
  • ex ante merger control: vertical agreements (trusts) and horizontal (cartels)
  • state aid control

European Union Economics and International Institutions (5 decks)

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