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 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

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