3.3 Economic Integration and Terms of Trade

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Trading bloc

A groups of countries that have agreed to reduce tariff and other barriers to trade for the purpose of encouraging in the development of free or freer trade and cooperation between them. See also free trade area, customs union and common market.

Monetary union

A high form of economic integration, involving the adoption by a group of countries of a single currency, such as some of the country sod the European Union ('euro zone' countries) that have adopted the euro. Monetary integration in addition involves the adoption of a common monetary policy carried out by a single central bank, which is necessitated by the use of a single currency.

Multilateral trade agreement

A trade agreement (or agreement to lower international trade barriers) between many countries; at the present time these are mainly carried out within the framework of the World Trade Organization (WTO), and involve agreements between WTO member countries. May be contrasted with bilateral trade agreement and regional trade agreement.

Regional trade agreements

A trade agreement (or agreement to lower international trade barriers) between several countries that are located within a geographical region (such as NAFTA, or North American Free Trade Agreement). May be contrasted with bilateral trade agreement and multilateral trade agreement.

Common market

A type of trading bloc in which countries that have formed a customs union proceed further to eliminate any remaining tariffs in trade between them; they continue to have a common external policy (as in a customs union), and in addition agree to eliminate all restrictions on movements of any factors of productions within them; factors affected are mainly labor and capital, which are free to cross all borders and move, travel and find employment freely within all member countries. The best-known common market is the European Economic Community (EEC, the precursor of the present European Union).

Free trade Area (FTA)

A type of trading bloc, consisting of a group of countries that agree to eliminate trade barriers between themselves; it is the most common type of integration area, and involves a lower degree of economic integration than a customs union or common market. Each member country retains the right to pursue its own trade policy towards non-member countries. An example of a free trade area is NAFTA (North American Free Trade Agreement).

Customs union

A type of trading bloc, consisting of a group of countries that fulfil the requirements of a free trade area (elimination of trade barriers between members) and in addition adopt a common policy towards al non-member countries; members of a customs union also act as a group in all trade negotiations and agreements with non-members. It achieves a higher degree of economic integration than a free trade area, but lower than a common market.

Preferential trade agreement

An agreement between two or more countries to lower trade barriers between them on particular products, resulting in easier access to the markets of other members for the selected products, compared with the access of countries that are not members.

Economic integration

Refers to economic interdependence between countries, usually achieved by agreement between countries to reduce or eliminate trade and other barriers between them. There are various degrees of integration, depending on the type of agreement and the degree to which barriers between countries are removed; see trading bloc, free trade area, customs union, common market, monetary union.

Deterioration in the terms of trade [HL]

a decrease in the value of the terms of trade index. See terms of trade. [HL]

Improvement in the terms of trade [HL]

an increase in the value of the terms of trade index. See terms of trade. [HL]

Terms of trade [HL]

relates the prices a country receives for its exports to the prices paid for its imports, and is given by the ratio of index of average export prices to index of average import prices times 100. An increase in the value of this ratio indicates a terms of trade improvement, meaning that a country can now buy more imports for the same amount of exports; a decrease in the value of this ratio indicates a terms of trade deterioration, meaning that a country can now buy fewer imports for the same amount of exports. [HL]

Bilateral trade agreement

trade agreement (or agreement to lower international trade barriers) involving two trading partners, usually two countries. It may also involve a trade agreement between one country and another group of countries when this groups acts as a single unit (such as the European Union). May be contrasted with regional trade agreement and multilateral trade agreement.


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