25 Economic Integration (done)

State the disadvantages of monetary unions

- Interest rates are decided by the central bank so a country cannot control local economy with monetary - A country cannot control exchange rates with monetary policy or otherwise to affect international competitiveness, imports and exports - Some argue that a monetary union is weak and vulnerable - Initial cost of converting the currencies may be very high

Define bilateral trade agreement

A bilateral trade agreement is an agreement relating to trade between two countries.

Explain how monetary union affect prices across borders

A common currency should lead to prices equalizing across borders as price differences become more obvious.

Define common markets

A common market is a customs union with common policies on product on product regulation, and free movement of goods, services, capital and labour.

Define Customs Union

A customs union is an agreement made between countries, where the countries agree to trade freely among themselves, and agree to adopt common external barriers against any country attempting to import into the customs union.

Define free trade area

A free trade area (FTA) is an agreement made between countries, where countries agree to trade feely among themselves, but are able to trade to trade with countries outside of the thee trade area in whatever way they wish.

Define multilateral trade agreement

A multilateral trade agreement is an agreement relating to trade between multiple countries.

Define preferential trading area

A preferential trading area (PTA) is a trading bloc that gives preferential access to certain products from certain countries. This is usually carried out by reducing, but not eliminating tariffs.

Define economic and monetary union

An economic and monetary union is a common market with a common currency and a common central bank.

Describe an example of trade diversion

Assume that Thai producers have a comparative advantage over the French in creating a textiles. If we assume that the UK joins the EU and increases tariffs and increases the tariffs on Thai textiles, there will be a shift from Thai producers to less efficient European producers.

Describe an example of trade creation

Assume that UK producers have a comparative advantage over the French in creating a lawnmower. If we assume that both join the EU and reduce tariffs, there will be a shift from French producers to English producers.

State possible benefits of economic integration

Benefits include greater size of market with potential for larger export markets, increased competition leading to greater efficiency, more choice and lower prices for consumers, increased investment, greater political stability and cooperation, increased trade,

Explain how monetary union affect business confidence, internal and trade growth

Business confidence, internal and trade growth is increased as the they are perceived to be less risky in trading among the countries

Define complete economic integration

Complete economic integration is the final stage of economic integration at which point the individual countries have no control of economic policy, full monetary union, and complete harmonisation of fiscal policy.

State an example of common markets

EU

State an example of economic and monetary union

EU has the euro currency and has the European Central Bank (ECB) as a central bank.

Describe economic integration

Economic integration describes a process whereby countries coordinate and link their economic policies. As integration increases, trade barriers decreases.

Describe how a monetary union may be weak and vulnerable

Initial cost of converting the currencies may be very high. Printing new currencies, collecting old currency, everything needs to be rebranded ....

Describe the affect on monetary union s on monetary policy

Interest rates are decided by the central bank so a country cannot control local economy with monetary. Individual countries are no longer free to set their own interest rates and so the tool of monetary policy is no longer an option to influence the inflation rate, unemployment rate and the rate of economic growth. This is especially damaging if one country in the union is experiencing an economic situation that is not being experienced by other.

Explain how more stable currencies result from monetary union and the effect

More stable currency because of the enhanced credibility of a large currency zone. This should reduce fluctuations and stabilise the currency against speculation than the individual currencies.

State an example of free trade area

North American Free Trade Area, which comprises the USA, Canada and Mexico was established in 1994 and today all trade in the NAFTA region is virtually tariff-free. Over 75% of Canada's exports go to the USA and USA's import share from Mexico has grown from 7 to 12%.

State an example of preferential trade area

PTA between the EU and the African, Caribbean and Pacific Group of states (ACP). It enables the EU to guarantee regular supplies of raw materials and the ACP countries to gain tariff preferences and access to special funds that are used to try to achieve price stability in agricultural and mining markets.

State possible benefits and losses of economic integration for a producer

Producers may see benefits from the larger market or they may be unable to compete and have to shut-down.

State possible benefits and losses of economic integration for poorer less powerful countries

Smaller or poorer nations might have problems with larger nations because they have less bargaining power.§

Define trade creation

Trade creation occurs when the entry of a country into a customs union leads to the production of a good or service transferring from a high-cost producer to a low-cost producer.

Define trade diversion

Trade diversion occurs when the entry of a country into a customs union leads to the production of a good or service transferring from a low-cost producer to a high-cost producer.

Explain how monetary union affect transaction costs

Transaction costs are eliminated. Whenever there is the need to exchange currency there is a charge when currencies are exchanged, which will be eliminated with a single currency.

State an example of customs union

common markets and economic and monetary unions are also customs unions, thus the EU has a customs union. Other examples include the Switzerland-Liechtenstein customs union, Mercosur, which is an agreement between Brazil, Argentina, Uruguay, Paraguay, and Venezuela.

State the advantages of monetary union

• Exchange rate fluctuations are eliminated • More stable currency • Business confidence, internal and trade growth is increased • Transaction costs are eliminated • A common currency should lead to prices equalizing across borders

Explain how exchange rate fluctuations are eliminated from monetary union and the effect

•Exchange rate fluctuations are eliminated. This should eliminate exchange rate uncertainty between the countries involved, which should increase cross-border investment and trade