3.4 Economic Integration

Question 1

What is economic integration?

Answer 1

Refers to the process of countries becoming more interdependent and economically unified. It can be achieved by preferential trade agreements between member governments to remove trade barriers.

Question 2

What are some forms of economic integration?

Answer 2

Preferential bilateral and multilateral trade agreements
Trading blocs
Monetary union
Foreign direct investment
Globalisation and expansion of international corporations.

Question 3

What is a preferential trade agreement?

Answer 3

A trade deal between two or more countries that gives special or favourable terms and conditions such as tax exemptions or tax concessions.

Question 4

What is a bilateral trade agreement?

Answer 4

A contractual trade arrangement between two countries.

Question 5

What is a multilateral trade agreement?

Answer 5

A legally binding trade deal between more than two countries, such agreements are made within the guidelines of the WTO.

Question 6

What is the difference between multilateral and bilateral trade agreements?

Answer 6

Bilateral agreements have greater flexibility than multilateral trade agreement since these contain many countries so they are far more complex.

Question 7

What are preferential trade agreements?

Answer 7

Give certain countries special and easier access to specific products in a market due to advantages such as the reduction or removal of tariffs and non tariff barriers to international trade.

Question 8

How must PTAs adhere to the principle of non discrimination?

Answer 8

A country cannot discriminate against other WTO member countries by imposing higher trade barriers on one country whilst reducing the trade barriers on imports from another country.

Question 9

What are the two exemptions to the principle of non discrimination?

Answer 9

Bilateral trade agreements and regional trading blocs. In both cases non member countries can have higher trade barriers imposed.

Question 10

What is a trading bloc?

Answer 10

A group of countries that agree to economic integration and more free international trade by removing trade barriers with one another.

Question 11

What are some positive of trading blocs?

Answer 11

It will intensify the degree of competition for producers within the member countries. Firms can benefit from access to a larger market without trade barriers thereby benefiting from economies of scale.

Question 12

What do trading blocs mean for non member countries?

Answer 12

The bloc imposes trade barriers for non member countries.

Question 13

What are the three categories of trading bloc?

Answer 13

A free trade area
A customs union
A common market

Question 14

What is a free trade area?

Answer 14

The least economically integrated trading bloc where member countries agree to remove trade barriers with one another but impose separate trade barriers with non member countries.

Question 15

What is a customs union?

Answer 15

A group of member countries that engage in free trade and impose a common external tariff for non member countries ie. all member impose the same trade restrictions on non member states.

Question 16

What is a common market?

Answer 16

The most integrated trading bloc. This is a customs unions that in addition to imposing the same trade restrictions on non member nations allows the free movement of goods, services, capital and labour between its member countries.

Question 17

What are some disadvantages of economic integration?

Answer 17

Especially common markets cause a loss of national economic sovereignty ie. the lost opportunity to enjoy economic independence eg. trading blocs might impose stricter environmental legislation and labour laws.
Detrimental changes in the economic conditions of one member countries are likely to affect the economic performance of all member countries.
It could lead to more unemployment in the short run. This is due to increase intensity of competition facing domestic firms in the trading bloc.

Question 18

Why do most economics believe that trade protection is more harmful to households and firms than economic integration?

Answer 18

Due to the dynamic efficiency gains from free trade and because of the reduced choice and higher prices under trade protection.

Question 19

What is a monetary union?

Answer 19

Exists when member states of a common market adopt a single currency and hence a common central bank that oversees monetary policy.

Question 20

How to countries achieve a monetary union?

Answer 20

Members of a common market must first agree to permanently fix their exchange rates to use a common currency and to establish a common central bank to be responsible for monetary policy. This means there is a conversion of interest rates within the monetary union so member states do not have flexibility in exercising their own monetary policy.

Question 21

How can a full monetary union be achieved?

Answer 21

A single currency is used by all member countries.

Question 22

What are the main advantages of a monetary union?

Answer 22

There is exchange rate certainty as a common currency is used this eliminates the risks associated with international trade due to exchange rate fluctuations and uncertainties.
Trade creation will occur between members of a single currency area due to the preferential trade agreement and the confidence in the use of a common currency. The use of a common currency also eliminates transaction costs as there is no need to exchange foreign currencies between members of the monetary union.
The use of a common currency attracts inward investment from non member states due to the removed risks associated with exchange rate fluctuations. Inward investment will have a positive impact on economic growth and employment in the monetary union.
There is price transparency ie. households and firms can compare prices across different member states at a glance.

Question 23

What are the main disadvantages of a monetary union?

Answer 23

There is a loss of economic freedom and flexibility as countries within the monetary union are unable to adjust macroeconomic policies to deal with their own specific economic problems.
The action taken by the common central banks have an asymmetric impact on different countries due to their varying circumstances.
Members of a monetary union are also deprived of exercising their own exchange rate policy. With independence the country can deprecates it currency during a recession or to combat a balance of payments deficit. This autonomy is not possible in a monetary union.