1. Define the term economic integration. What are the different levels of economic integration? How do they differ from each other?
An economic arrangement between different regions marked by the reduction or elimination of trade barriers and the coordination of monetary and fiscal policies. The aim of economic integration is to reduce costs for both consumers and prioducers.as well as to increase trade between the countries taking part in the agreement.
Levels of Economic Integration: NAFTA Customs Union Common Market Economic Union Political Union
Type Free trade External Tariff Free factor Fiscal& monetary
Free trade EFTA
Customs union EEC57
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Services and factors of production among each other.
Discrimination: Members and Non-members.
The economic case for regional integration is straightforward. Economic theories of international trade predict that unrestricted free trade will allow countries to specialize in the production of goods and services that they can produce most efficiently.
3. What is Most Favoured Nation (MFN) principle? Are trade blocs consistent with MFN principle?
MFN principles means that trade barriers should be lowered equally without discrimination among member nations of General Agreement of Trade and Tariffs. (GATT)
Lowering trade barriers under MFN principles benefit the world as a whole by promoting efficient industries internationally.
Permanent Normal Trade Relations (PNTR) in USA after 1998=MFN
4. Define the terms ‘trade diversion” and “trade creation”
Trade diversion means that a free trade diverts trade, away from a more efficient supplier outside the FTA, towards a less efficient supplier within the FTA.
Trade creation means that a free trade area creates trade that would not have existed otherwise; as a result supply occurs from a more efficient producer pf the produce.
5. Assume that Australia is about to join Indonesia in a Free trade area. Before this union, Australia imports 10 million traveling bags from the USA at $100 a bag and adds a tariff of $30 per bag. Cost 2 price of a bag in Indonesia is $110. Once the FTA is formed, what would be the cost to Australia of the bag trade diverted to Indonesia? How much extra imports would have to be generated in Australia to offset this trade diversion welfare cost? How would a firm outside this FTA react to the creation of this trade bloc?