Econonomic integration

S25 Economic Integration

Define Economic Integration:

Describes a process whereby countries coordinate and link their economic policies.

As the degree of economic integration increases, the trade barriers between countries decrease and their fiscal and monetary policies start to synchronize.

Differentiate between bilateral trade agreements and multilateral trade agreements.

                                                                                                                                                                                                               Examples

Bilateral	•A bilateral trade agreement is an agreement relating to trade between two countries. The aim is usually to reduce or remove tariffs and/or quotas that have been placed on items traded between the two countries.
Multilateral	•A multilateral trade agreement is an agreement relating to trade between multiple countries. It also usually aims to reduce or remove tariffs and/or quotas that have been placed on traded items, but the agreement applies to all the multiple countries involved.

Illustrate and Explain

Trade Creation

Trade Diversion

Trading Blocs: Defined as a group of countries that join together in some form of agreement in order to increase trade between themselves or to gain economic benefits from cooperation on some level. This coming together is economic integration.

Advantage and disadvantages

1. Exchange rate fluctuations will disappear eliminating uncertainty

2. Enhanced currency credibility should be more stable against speculation

3. Business confidence in member countries tends to impove b/c less risk is perceived which should lead to growth

4. Exchange transaction costs are eliminated within the union

5. Common currency makes price differences more obvious so over time

•Though they clearly favor increased trade among members; they may be discriminatory against non-members.

•Discriminatory policies can be damaging to multilateral trading negotiations of the WTO.

•They may even undermine international trade rules and limit potential gains to trade achievable with more liberalized world trade.

•The downsides to trading blocs may be more obvious for small or poor economies that have little bargaining power. 

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1.     Illustrate and explain trade creation and trade diversion

Trade creation- when a country enters a customs union and production switches from a high cost to a low cost proudcer there iss an increase in efficiency and consumer surplus

2.     Occurs when the entry of a country into a custom union leads to the production of a good/ service transferring from a low cost to a high cost to a high cost producer

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1)   Using the quantitive figures from last class, explain and illustrate what you would expect to happen to the exchange rate as a result of the international trade that has taken place in 2011

For country x the currency depreciates because they are importing more than they are exporting meaning

2)   Explain the relevance of the reserve asset funding to the balance of payments.

They are going to sell reserves to balance their payments

3)   Explain the concept of current transfers

Also called the invisible trade balance, service balance or net services.

•       It is a measure of the revenue received from the exports of services, minus, the expenditure on the imports of services over a given time period.

•       Examples: banking, insurance, tourism

Terms of trade notes

Terms of trade

Introduction	An index that shows the value of a countrys average export prices relative to their average import prices Terms of trade= Weigted index of average export prices/ weigted index of average import prices
Causes of changes in a county's	Short run causes- Changes in the conditions of demand and supply- Changes in relative inflation rates- Change in exchang rates- Long run causes- income changes- Long run improvments in productivity within a country Log run improvements in technology within a country
Elasticity of demand	Price Elasticity of demand for imports and exports Price elasticity of demand for exports – A measure of the responsiveness of the demand for exports when there is a change in the price of exports. PED exports= percentage change in demand for exports/ percentage change in average price of exports Outcome- good: if exports prices were galling exports demanded would rise by more than the price falles leading to increase in export revenues Price elasticity of demand for imports- Price elasticity of demand for imports – A measure of the responsiveness of the demand for imports when there is a change in the price of imports. PED imports= percentage change in demand for imports/ percentage change in average price of imports
How beneficial is an improvement in the terms of trade	Prices in other countries rises > domestic exports become more competitive Incomes in other countries rises > demand for goods rises Taste and preferences change towards domestic exports > higher demand for exports Higher export prices caused by domestic inflation -   Relative export prices may increase because a country is experiencing inflation that is higher than in the countries it trades with If demand is inelastic > an increase in price will lead to a smaller decrease in demand = total export revenue will rise If demand is elastic > an increase in prices will lead to a greater decrease in demand = total export revenue will fall
The significance of deteriotating TOT for Devoloping countries	Countries dependent on one or two major exports - downward trend in comodoty prices for many years because- •       A substantial increase in the supply for commodities (mainly caused by improvements in technology) •       The discovery of synthetic replacements for natural commodities (such as plastics replacing metals…) •       As developed countries become richer, incomes have risen > demand for commodities has not risen as much as demand for manufactures goods (manufactured goods tend to have an income elastic demand unlike commodities) •       Agricultural policies in developed countries have had a damaging effect on world agricultural markets. (over-production by domestic producers in developed countries is sent to the world market, pushing down the overall market prices > considered a form of DUMPING and ruining developing country’s agricultural industries •       Huge leaps in technology, products have become smaller Harmful consequences- •       Developing countries have to sell more and more exports to buy the same amount of imports - causing even lower prices for commodities •       High levels of indebtedness are harder to pay back  causing, once again, even lower prices for commodities Overusing of resources to increase export revenue -massive deforestation, desertification, soil erosion

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Distinguish between bilateral and multilateral trade agreements

Between 2 and between many countries

Explain and give an example of each of the six stages of economic integration described by Bela Balassa

Preferential trading areas

A trading bloc that gives preferential access to certain products from certain countries.

Usually carried out by reducing (but not eliminating) tariffs.

·         free trading areas

When countries agree to trade freely within the FTA, but are able to trade with countries outside the FTA in whatever way they wish.

·         Custom unions

When countries agree to trade freely within the CU, and also agree to adopt common external barriers against any country attempting to import into the Customs Union.

All common markets and economic and monetary unions are also customs unions, thus the EU is customs union [plus a common market].

·         Common markets

Common markets are customs unions with common policies on product regulation & free movement of goods, services, capital and labor.

The best known example of a common market is the EU.

·         Economic and monetary union

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

The best example of an economic and monetary union is the Eurozone, which includes EU member countries that have adopted the Euro as their currency.

·         Complete economic integration

This would be the final stage of economic integration

Individual countries involved would have no control of economic policy, full monetary union, and complete harmonization of fiscal policy.

This is what the Eurozone is moving toward.

Chart the advantages and disadvantages of a monetary union for its members

•       Benefits in economic terms include:

§  greater size of market with the potential for larger export markets

§  increased competition leading to greater efficiency

§  more choice

§  lower prices for consumers

•       Consequences are uneven

§  Some domestic producers will gain from a larger market while others may not be able to compete.

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2)            Explain the marshal Lerner condition

has been cited as a technical reason why a reduction in value of a nation's currency need not immediately improve its balance of payments.[1] The condition states that, for a currency devaluation to have a positive impact on trade balance, the sum of price elasticity of exports and imports (in absolute value) must be greater than 1.

1)            Illustrate and explain the J-curve effect

In economics, the 'J curve' refers to the trend of a country’s trade balance following a devaluation or depreciation under a certain set of assumptions. A devalued currency means imports are more expensive, and on the assumption that the volume of imports and exports change little immediately, this causes a depreciation of the current account (a bigger deficit or smaller surplus).

Economic integration

Economic integration

Introduction	Describes a process whereby countries coordinate and link their economic policies. As the degree of economic integration increases, the trade barriers between countries decrease and their fiscal and monetary policies start to synchronize.
Trading blocs	Defines as a group that joins together in some form of agrement in order to increase trade between themselves sic stage ·         Preferential trading areas A trading bloc that gives preferential access to certain products from certain countries. Usually carried out by reducing (but not eliminating) tariffs. ·         free trading areas When countries agree to trade freely within the FTA, but are able to trade with countries outside the FTA in whatever way they wish. ·         Custom unions When countries agree to trade freely within the CU, and also agree to adopt common external barriers against any country attempting to import into the Customs Union. All common markets and economic and monetary unions are also customs unions, thus the EU is customs union [plus a common market]. ·         Common markets Common markets are customs unions with common policies on product regulation & free movement of goods, services, capital and labor. The best known example of a common market is the EU. ·         Economic and monetary union An economic and monetary union is a common market with a common currency. The best example of an economic and monetary union is the Eurozone, which includes EU member countries that have adopted the Euro as their currency. ·         Complete economic integration This would be the final stage of economic integration Individual countries involved would have no control of economic policy, full monetary union, and complete harmonization of fiscal policy. This is what the Eurozone is moving toward.
An evaluation of trading blocs	Depends on degree of integration •       Benefits in economic terms include: §  greater size of market with the potential for larger export markets §  increased competition leading to greater efficiency §  more choice §  lower prices for consumers •       Consequences are uneven §  Some domestic producers will gain from a larger market while others may not be able to compete.
Trade creation and trade diversion	Trade creation- Trade diversion-

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1)      Describe a fixed exchange rate system and explain the actions required to maintain currency x fixed.

2)      Draw and explain quota graph.

1) When the value of a currency is pegged (fixed) to the value of:

a.       another currency

b.      the average value of a selection of currencies

c.       the value of a commodity (gold for example)

If a currency devalues then the coutry will need to buy its currency on the forex to increase D then the exchange rate increases

If a currency  revalues then the country will need to sell its currency on the forex, to increase S then decrease the exchange rates

2)           

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