What does economic integration mean?
Economic integration involves the merging of national boundaries which separate economic activity in one nation state from another
What does free trade areas mean?
A group of countries where tariffs and non-tariff trade barriers between members are generally abolished but with no common trade policy toward non members
Examples of FTAs
-EFTA (the European free trade association)
-USMCA is a free trade agreement between the USA, Mexico and Canada
-ASEAN (southeast Asian nations)
What does a customs union mean?
A group of states have agreed to charger the same import duties 1(commonly external tariff -CET) and usually to allow free trade between themselves.
27 Eu member states (Andorra, Turkey and San MArino have separate trade agreements with the EU)
What are some common features of a customs union?
-remove barriers such as custom checks and charges
-limits the freedom of individual members to strike their own trade deals
-members typically negotiate any multilateral trade deal as a single bloc
-no need for rules of origin, since any product entering the area would be subject to the same tariff rates and/or quotas regardless of the point of entry
What are the advantages of a customs union ?
-Countries will benefit if trade creation is greater than trade diversion
-firms may gain economies of scale as the size of market is potentially larger
However, gains depend on the homogeneity of the market and economies of scale may be seen only gradually as some domestic companies merge with foreign companies
-Within a larger market, there is likely to be increased competition which leads to innovation, lower costs of production and hence prices
However, mergers may lead to an oligopolistic market structure. There may be need for competition policy to prevent the abuse of monopoly power
What are the disadvantages of a customs union?
1)increased inequality within the CU due to:
-countries in the CU which are particularly successful will attract more economic activity
-less successful economies can become “branch economies” where firms set up branches for low productivity tasks. This worsens regional disparities as poorer regions may lose the most skilled workers from their labour force
-geographically, countries in the centre of the customs union will tend to have lower transport costs
2) transaction costs in administrating the CU can become high.
However they may also receive greater revenue from the CET (common external tariff)
3) if CETs are high, trade diversion is far more likely which may reduce welfare for the economies affected by the increased trade diversion to higher costs producers within the CU
What is a single market (common market)?
A single market (SM) removes all barriers to mobility; workers, capital and other resources are free to move within the area in question. It also means eliminating non tariff barriers to trade, such as harmonising product standards
What are some examples of single market (common market)?
Example: the single European market (SEM), which is based on four freedoms:
1.free trade in good: firms producing in the SEM can sell their products anywhere within the existing EU member states;consumers can buy from where they want
2.Free trade in services: professional services can be offered in any member states
3.Free movement of labour: Citizens of EU member states can live with and work in any other member state
4.Free movement of capital: finance and capital can flow freely between member states, ad EU citizens can use financial services in an member state
What are the advantage of the SEM?
-An increase in competition should lead to greater specialisation within the EU, a reallocation of resources to more efficient producers (productive efficiency), and improved allocative efficiency
Raised living standards for consumers
-increased competition within the EU markets should provide grater incentive for firms to reduce waste in production; there should be less X inefficiency
-size of the EU markets allows businesses to exploit economies of scale and scope
-Greater labour market flexibility; firms have access to workers with a variety of skills
-Encourage cross-border technological alliances. Potentially a boost in dynamic efficiency
-A stronger and more integrated EU economy may be less vulnerable to global external shocks
What are the disadvantages of the SEM?
-Extra budgetary costs for financing EU administration
-social and economic pressures from inward migration:increased strain to health, education and social services in countries attracting high levels of net inward migration.
there could be also be an outflow of the most productive workers from lower income countries
-Shifts of FDI and jobs to lower wage costs and/or higher productivity economies
- to be in the SEM, each country must be a member of the Customs Union; thus, the disadvantages of not being able to have control over trade policy remains
-possible increased dominance in large EU markets of large scale European monopolies or oligopolies
-possible diseconomies of scale from increased size of firms operating in larger markets
- a single market is also typically associated with a broad convergence of fiscal and monetary policies. As increased interdependence, means that one members policy decisions can have a larger effect on other members. This can place serious limitations on each country’s ability to pursue independent economic policies
What is meant by a monetary union?
A currency union is when two or more countries share a common currency or decided to peg their exchange rates to keep the value of their currency at a certain level.
it also means there is one monetary policy for all members
There is a monetary union in europe called the economic and monetary union (EMU) and its bank rate is set by ECB (European central bank)
What conditions are need for a successful monetary union?
-Free movement of labour and capital
-Automatic fiscal transfers when individual countries are performing poorly
-countries need to have some coordination when it come to fiscal policy
-similar business cycles: otherwise it becomes difficult to implement monetary policy. A single interest rate does not suit all economies. It is hard to choose the ‘right interest rate’. By swtiching to a common currency, member countries lose the ability to to restore their competitiveness via exchanges rate depreciation
What are the advantages of a monetary union?
- Greater price transparency - makes it easier for consumers to compare prices between countries and to buy from the cheapest source.
2.Reduced exchange rates costs, such as commission/charges imposed by banks; lower exchange rates risk; lower hedging costs for exporting/importing
3.more trade and greater economies of scale (big market, cross country mergers)
4.inward investment:countries within the EU are seen to have a competitive advantage over those outside the EU
5.Price stability
6.Imposes discipline on domestic firms: since rising costs cannot be compensated for by a deprecation of the exchange rate against other EU members, domestic firms will thrive to match the productivity of other members
7.financial support from member states: in cases of financial difficulty, member states may grant loans
What are the disadvantages of monetary union?
1.Loss of domestic monetary policy autonomy: a country can no longer set interest rates based on its own domestic macroeconomics objectives
2.’One size fits all’ interest rates are set for the whole currency area, and cannot possibly optimal for every country
3.adjustment costs: the change-over process for introducing a single currency will involve substantial menu costs for firms and banks
4.loss of appropriate adjustment of the exchange rate to offset the BoP imbalances
5.relative deflationary bias
6.Fiscal constraints: the growth and stability pact limits the scale of government borrowing to 3% of national income
7. Many critics of common currencies highlight the lack of economic convergence of members
8.Structural problems:regions grow at different rates
What is meant by an economic union?
A common market with provisions for the harmonisation of economic policies, particularly macroeconomic and regulatory. Economics unions require formally coordinated monetary and fiscal policies and well as labour market, regional development, transportation and industrial policies
Table showing the effects of each type of economic integration
What does an optimal currency area mean?
An optimal currency area is a geographical region where it is thought a single currency would help to maximise economic welfare and enhance macroeconomic performance over a period of time.
What is required for an optimal currency area (OCA)?
1.Countries within it to be very highly integrated
2.The impact of interest rate changes to have a broadly similar effect on business and household from country to country
3.fiscal transfers between members
4.Each country has a flexible labour market
Labour market flebility may include
A)flexibility in real wage and salaries
B)Workers with flexible and adaptable skills
C)A high level of labour mobility
D)Flexible employment contracts
What are the key functions of the World trade organisation(WTO)?
1.Negotiating the reduction or elimination of obstacles in trade (monitoring: product dumping, subsidies, product standards)
2.administering and monitoring the application of the WTO’s agreed rules for trade in goods,services and trade related intellectual property rights
3.monitoring and reviewing the trade policies of its members
4.settling disputes among members
Some evaluation points of the role of the WTO
-WTO comes under pressure from countries that still want to maintain some degree of protectionism (transitions costs of removing protectionist policies, with structural unemployment due to declines in some industries)
-the agricultural sector is an especially contentious area. Developed countries have maintained large scale policies in place to support their agriculture sectors. Developing countries are therefore less willing to freer trade
-anti-globalisation argument that suggests that there are significant environmental costs
(Fragmentation of the production process there is need to transport good around the world)
-benefits of free trade can be unfairly distributed
-given that over 75% of WTO members are developing or emerging economies, the WTO succeeding in continuing to promote free trade relies on ensuring the benefits are realised by developing countries.The WTO has therefore made special provisions for developing countries
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1.093
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2.4 Inflation35
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2.5 Balance Of Payments25
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2.3 Unemployment37
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3.1 Fiscal Policy47
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Monetary Policy24
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Inflation5
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Suuply Side Policy19
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Phillips Curve7
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4.1 And 4.3 International Trade11
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4.4 Trade Policies: Protectionism21
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4.2 Exchange Rates35
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4.3 Globalisation18
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4.4 Economic Integration21
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2.2 And 5.2 Development29
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2.7 Income Distribution33
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Facts12
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5.1 Money And Interest Rates14
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2.1 Economic Growth36
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5.2 The Financial Sector8
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5.3 Financial Regulation13
