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Ch 25 - Economic Integration

  • Economic Integration: a process whereby countries coordinate and link their economic policies

    • As economic integration increases, trade barriers increase, monetary/fiscal policies are harmonised

  • Preferential trade agreements: give preferential access to certain products by reducing or eliminating tariffs, or by other agreements related to trade

  • Two types:

    • Bilateral agreements: between two countries → easier to implement

    • Multilateral agreements: between two or more countries → beneficial to more people

  • Trading bloc: an agreement where trade barriers ar reduced or eliminated among participating members

  • Trade bloc advantages:

    • Free trade within the bloc

    • Easier access to other market

    • Firms can expand

    • More employment due to growth in exports

    • Trade creation

  • Trade bloc disadvantages:

    • Trade diversion

    • Reduced benefits of free trade

    • Inefficiencies

    • Common external tariffs may cause others to retaliate

  • Trade creation: occurs when the entry of a country into a custom union leads to the production of a good or service transforming from a high-cost producer to a low-cost producer

    • Beneficial since cheaper supplies from abroad allows for lower prices that benefit the consumer

Trade creation diagram

  • Trade diversion: when the entry of a country into a customs union leads to the protection of a good or service

    • Trade is diverted from a more efficient exporter to a less efficient one, rather than creating new trade. Due to the common external tariff that the country agrees to.

    • May not be the best at promoting free trade

Trade diversion diagram

  • Monetary union: agreement between two or more countries creating a single currency

  • Monetary union advantages:

    • Transparency: International price of goods can be easily compared

    • lower transaction costs: single currency, no need to change currency

    • certainty: price changes are more predictable

    • better for the job market as it leads to more employment

  • Monetary union disadvantages:

    • Loss of economic sovereignty: individual countries cannot set their own interest rates

    • Inefficiencies firms within the union are favoured more over efficient firms outside the union

Ch 25 - Economic Integration

  • Economic Integration: a process whereby countries coordinate and link their economic policies

    • As economic integration increases, trade barriers increase, monetary/fiscal policies are harmonised

  • Preferential trade agreements: give preferential access to certain products by reducing or eliminating tariffs, or by other agreements related to trade

  • Two types:

    • Bilateral agreements: between two countries → easier to implement

    • Multilateral agreements: between two or more countries → beneficial to more people

  • Trading bloc: an agreement where trade barriers ar reduced or eliminated among participating members

  • Trade bloc advantages:

    • Free trade within the bloc

    • Easier access to other market

    • Firms can expand

    • More employment due to growth in exports

    • Trade creation

  • Trade bloc disadvantages:

    • Trade diversion

    • Reduced benefits of free trade

    • Inefficiencies

    • Common external tariffs may cause others to retaliate

  • Trade creation: occurs when the entry of a country into a custom union leads to the production of a good or service transforming from a high-cost producer to a low-cost producer

    • Beneficial since cheaper supplies from abroad allows for lower prices that benefit the consumer

Trade creation diagram

  • Trade diversion: when the entry of a country into a customs union leads to the protection of a good or service

    • Trade is diverted from a more efficient exporter to a less efficient one, rather than creating new trade. Due to the common external tariff that the country agrees to.

    • May not be the best at promoting free trade

Trade diversion diagram

  • Monetary union: agreement between two or more countries creating a single currency

  • Monetary union advantages:

    • Transparency: International price of goods can be easily compared

    • lower transaction costs: single currency, no need to change currency

    • certainty: price changes are more predictable

    • better for the job market as it leads to more employment

  • Monetary union disadvantages:

    • Loss of economic sovereignty: individual countries cannot set their own interest rates

    • Inefficiencies firms within the union are favoured more over efficient firms outside the union

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