Economic Integration Unit 2

According to trade theory, what is the effect of free trade on world production?

Free trade is suggested to maximise world production.

What is the primary purpose of using import restrictions like tariffs?

They are used to help domestic producers, a practice known as protection.

An import tax is also known as a(n) _.

tariff

How does an import tariff affect domestic producers in the home market?

It helps home producers increase their share of the home market, potentially increasing employment in that sector, by inducing a tax on foreign goods.

Besides helping domestic producers, what is another benefit of an import tariff for the government?

It generates revenue for the government.

What is the negative consequence of an import tariff for consumers?

It makes imports more expensive for consumers.

What type of regional trade grouping was formed by the European Economic Community under the Treaty of Rome (1958)?

A customs union (CU).

What is the first requirement that members of a customs union (CU) must fulfill regarding internal trade?

They must end all tariffs and quotas on trade inside the CU.

What is the second requirement for customs union (CU) members regarding trade with non-members?

They must replace national tariffs on trade with non-members with a common external tariff (CET).

What is the third requirement for customs union (CU) members concerning revenue?

They must agree on rules for sharing the revenue from the common external tariff (CET).

In customs union theory, the economic benefit depends on whether extra trade is new trade, known as , or if it is diverted from non-members, known as .

trade creation (TC); trade diversion (TD)

Who was the pioneer in customs union research who put forward a model with very restrictive assumptions?

Jacob Viner.

In Viner's customs union model, from which type of production do consumers switch in a case of trade creation?

Consumers switch from high-cost home production to lower-cost partner production.

Why is trade creation considered beneficial for economic welfare?

Production is switched to a lower cost source, and consumers pay lower prices.

In a case of trade diversion, consumers switch from lower-cost rest of the world production to what?

Higher-cost partner production.

Why does trade diversion occur in a customs union?

The tariff is scrapped on imports from the partner but not on imports from the rest of the world (RoW).

Why is trade diversion considered harmful to economic welfare?

Production moves to a higher-cost source, and governments lose tariff revenue.

In the context of demand curves, what is Marginal Utility (MU)?

Marginal Utility (MU) is the change in total utility for an extra unit consumed.

In the context of supply curves, what is Marginal Cost (MC)?

Marginal Cost (MC) is the additional cost incurred in producing an extra unit.

What does the 'consumer surplus' represent?

It is the difference between what a consumer is willing to pay and what they actually paid for a product.

What does the 'producer surplus' represent?

It is the difference between the market price and the lowest price a producer is willing to accept to produce a good.

What is the key feature of a partial equilibrium (PE) model in economic analysis?

It focuses on one market and ignores knock-on effects of any changes on other markets.

A customs union is considered a _ trade policy because it treats imports from different origins differently.

preferential

What are the three components used to measure the overall welfare impact of a customs union?

Changes in consumer surplus, producer surplus, and taxpayer (tariff) revenue.

What year was the EU Customs Union started, and when was it completed?

It started in 1958 and was completed in 1968.

Between 1958 and 1972, what was the average annual growth rate of trade between member countries of the European Economic Community (EEC)?

Trade between member countries grew by 15% a year.

What is the term for the hypothetical world used in empirical studies to estimate what would have happened if a policy (like a CU) had not been formed?

An 'anti-monde' or counter-factual.

Early empirical studies of the EEC CU found that was far greater than for manufactured goods.

trade creation; trade diversion

A 2004 study concluded what was the main factor (70%) behind the rapid growth of intra-EU trade from 1960-2000?

Rising incomes.

When the UK joined the EU in 1973, studies found that the increase in trade was mostly due to what effect?

It was mostly due to trade creation (TC), with trade diversion (TD) being small.

Contrary to pre-1958 expectations, industrial specialization in the EEC did not lead to countries having very different specializations. What actually happened to bilateral trade patterns?

Bilateral trade patterns (e.g., French exports to Germany and German exports to France) became more similar.

What is intra-industry trade (IIT)?

A country simultaneously importing and exporting products of the same industry.

What is intra-industry specialization?

A country specializes in different parts of the same industry.

What market structure, which balances more consumer choice against more economies of scale, helps explain the occurrence of intra-industry trade?

Monopolistic competition.

How does forming a customs union facilitate intra-industry trade and benefit consumers and producers?

It can give consumers more choice (variety) and allow firms to specialize on fewer varieties at a larger scale and lower cost.

What is the difference between Vertical IIT and Horizontal IIT?

Vertical IIT involves goods of different quality, while Horizontal IIT involves products differing in minor aspects like colour.

Even after the EU Customs Union was completed in 1968, the European market remained fragmented due to what?

Non-tariff barriers (NTBs).

What was the name of the European Commission's 1985 paper that identified non-tariff barriers and aimed to complete the internal market?

The 1985 White Paper 'Completing the Internal Market'.

Name two of the four types of non-tariff barriers identified in the 1985 White Paper.

Physical barriers (border controls), tax barriers (VAT), technical barriers (national rules), and government 'buy national' measures.

What was the predicted GDP increase from eliminating non-tariff barriers, according to the Cecchini Report?

The Cecchini Report predicted that eliminating NTBs could increase GDP by 5%.

What is the first main source of economic gain from the Single Market, according to Cecchini (1988)?

Standard cost savings and specialization from eliminating frontier controls and other non-tariff barriers.

What is the second main source of economic gain from the Single Market?

Economies of scale, as firms can spread costs like R&D over more output.

What is the third main source of economic gain from the Single Market?

Increased cross-border competition, which raises efficiency and innovation.

The 1985 Single Market programme aimed to create 'an area without internal frontiers' by establishing what four freedoms of movement?

The four freedoms of movement of goods, services, persons, and capital.

What action was taken in 1993 to remove physical barriers within the Single Market?

Intra-EU frontier controls were ended.

How did the Single Market programme address technical barriers to trade?

It sought to replace 28 national standards with one EU standard or implement mutual recognition of each other’s standards.

What policy was introduced to end 'discriminatory public procurement' in the Single Market?

All state bodies were required to buy from the cheapest source, including imports from the EU, and publish details online.

What is 'social dumping'?

A practice where foreign service providers can undercut local providers because they are not required to comply with the host country's social standards.

How did the European Commission's estimate (2003) of the one-off gain from the Single Market compare to the prediction by Cecchini?

The estimated gain was 1.8% of GDP, which was smaller than the 5% predicted by Cecchini.

In Jacob Viner's customs union model, what assumption is made about the supply price from each source?

The supply price is given and is unaffected by the quantity produced.

In Jacob Viner's customs union model, what is the key variable of interest being analyzed?

The cost of supply.

Standard customs union theory assumes _ competition, which means there are no adjustment costs when resources are reallocated.

perfect

In the partial equilibrium model of CU formation, how is the 'home country' characterized?

The home country is small and has an upward sloping supply curve.

In the partial equilibrium model of CU formation, how are the 'partner country' and 'rest of the world' characterized?

They are large and have a perfectly elastic supply.

What was a major reason why the widespread job losses feared from the EEC's formation in 1958 did not occur?

It was the 'Golden Age' of fast economic growth and there was a long transition period, leading to little unemployment.

How can the formation of a customs union lead to lower costs in an industry like sofa manufacturing?

Firms can specialize in fewer varieties, producing each on a larger scale, which lowers the average cost per unit.

The equilibrium in an industry with monopolistic competition depends on how strongly consumers value what?

Variety of choice.

If consumers have a strong preference for variety, the market equilibrium will feature firms and average costs.

many; high

If consumers have a weak preference for variety, the market equilibrium will feature firms and average costs.

few; low

A 2005 study by Copenhagen Economics argued that a Single Market in services could create how many jobs?

It could create 600,000 jobs.

Despite its importance, what has hampered the creation of a fully integrated single market for non-financial services?

Strong resistance to proposals, often due to fears of 'social dumping'.

What do more recent studies, like Straathof and Linders (2008), argue is happening to the effect of the Single Market over time?

They argue that with growing globalisation, the effect of the Single Market is decreasing.

In CU theory, what does the conclusion that trade creation is beneficial assume about workers and machines?

It assumes they are flexible and can be switched to new jobs in export industries without adjustment costs.