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
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- 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
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- 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
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- Trade bloc disadvantages: * Trade diversion * Reduced benefits of free trade * Inefficiencies * Common external tariffs may cause others to retaliate
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- 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
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- 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
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- Monetary union: agreement between two or more countries creating a single currency
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- 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
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- 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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