Global Economics essay plans Flashcards
Benefits of a customs union - Free trade
Operating beyond the countries PPF, because of specialisation and comparative advantage, boost long run growth as a result.
Trade creation, DIAGRAM, this is a increase in economic welfare from joining a free trade area such as a customs union like the EU.
Exploitation of economies of scale as the market expands, increased competition means more Invesment, more dynamic efficiency and likely lower prices for consumers.
EVAL whether the CU increases efficiency depends on whether trade creation is greater than trade diversion, this depends on the level of tariffs pre and post CU, however the EU has high tariffs on agricultural goods which non-EU countries tend to have comparative advantage in.
Benefits of a Customs Union - Common external trade policy
Removal of bureaucracy, no need for
Trade diversion, this is a theory that derives from a country’s entry into a currency union, this involves a movement from a low-cost foreign producer outside the customs union to a high-cost producer within a customs union.
EU has 500 million people and a shared economy rivalling the US, therefore individual countries have greater bargaining power in trade deals.
Trade deflection occurs when a country picks the country with the lowest tariffs in a free trade area and then moves the good within the free trade area, common external tariffs means that there is no need for rules of origin and complete protection against the possibility of trade deflection.
Costs of a Customs Union - Cons of free trade and trade diversion
There are a number of cons associated with not being able to implement protectionist measures, no protection against dumping, senile and infant industries may struggle.
Trade diversion.
Initially let’s say the UK is importing from Thailand, as they have comparative advantage, they are undergoing free trade, meaning Thailand imports initially represent Q1 to Q2. However when the Uk joins the currency union they are forced to place tariffs on Thai goods now. Because there is a common external tariff that pushes the price up so high, EU suppliers have become more competitive.
This means that production is concentrated in countries with lower opportunity cost and comparative advantage.
Costs of a customs union - Loss of sovereignity
A country can no longer negotiate separate deals because there is a common external tariff, this means they lose economic and national sovereignty, not all countries are going to want the same trade policies.
Less control and voice when deciding trade deals, forced to have free trade with other countries, one country may have CA in a particular good however this may be a infant industry for another member.
Benefits of Joining the EU/Single market - Trade
Operating beyond the countries PPF, because of specialisation and comparative advantage, boost long run growth as a result.
Trade creation, DIAGRAM, this is a increase in economic welfare from joining a free trade area such as a customs union like the EU.
Exploitation of economies of scale as the market expands, increased competition means more Invesment, more dynamic efficiency and likely lower prices for consumers.
EVAL whether the CU increases efficiency depends on whether trade creation is greater than trade diversion, this depends on the level of tariffs pre and post CU, however the EU has high tariffs on agricultural goods which non-EU countries tend to have comparative advantage in.
Removal of bureaucracy, no need for customs checks on the border and rules of origin.
Trade deflection, this is a theory that derives from a country’s entry into a currency union, this involves a movement from a low-cost foreign producer outside the customs union to a high-cost producer within a customs union.
EU has 500 million people and a shared economy rivalling the US, therefore individual countries have greater bargaining power in trade deals.
Trade deflection occurs when a country picks the country with the lowest tariffs in a free trade area and then moves the good within the free trade area, common external tariffs means that there is no need for rules of origin and complete protection against the possibility of trade deflection.
Benefits of joining the Eu/Single market - Free movement of labour
Eu single market has movement of labour has one of its fundamental freedoms.
More flexible labour markets, this means that the labour market will quickly adjust to a competitive equilibrium.
The supply of labour will likely rise, the LF in the UK will increase, this will mean that the LRAS will shift out and there will be long run growth as a result.
This is because there is a large supply of labour and significant geographical and occupational mobility of labour, meaning workers can switch jobs easily.
Lower COP for firms, lower wage inflation expectations.
A8 workers coming into the UK easily from elsewhere in the currency union have a net positive fiscal contribution, they have higher employment rate, and higher labour force participation rate, in the UK the revenue to expenditure ratio is 1.4, oppose to 0.9 for native brits.
A8 members are also 60% less likely to receive benefits or tax credits.
Costs of joining the EU/single market - Costs of trade
There are a number of cons associated with not being able to implement protectionist measures, no protection against dumping, senile and infant industries may struggle.
Trade diversion.
Initially let’s say the UK is importing from Thailand, as they have comparative advantage, they are undergoing free trade, meaning Thailand imports initially represent Q1 to Q2. However when the Uk joins the currency union they are forced to place tariffs on Thai goods now. Because there is a common external tariff that pushes the price up so high, EU suppliers have become more competitive.
This means that production is concentrated in countries with lower opportunity cost and comparative advantage.
A country can no longer negotiate separate deals because there is a common external tariff, this means they lose economic and national sovereignty, not all countries are going to want the same trade policies.
Less control and voice when deciding trade deals, forced to have free trade with other countries, one country may have CA in a particular good however this may be a infant industry for another member.
Costs of joining the EU/single market - Cons of free movement of labour
There are rising negative externalities associated with free movement of people, uncontrolled movement of labour could drain public resources and take advantage of benefit systems and not pay sufficient taxation, including growing pressure on infrastructure and merit goods such as the healthcare and education services. Rapid migration from the EU can cause strain on public services.
Brain drain, this is the idea that a country loses its best, most productive and most skilled workers, developing countries in the EU or single market will struggle to develop. For example in the EU there is substantial immigration from eastern and central Europe towards the western Europe.
HOWEVER migrants send money back to their country through remittances, this can be a important contribution to GDP, and they can return with improved skills and knowledge.
Costs of joining the eurozone - The first main issue when joining a currency union is loss of independence over monetary policy and exchange rates.
Interest rates are set by the ECB in the eurozone.
Monetary policy is a very important tool for controlling inflation and adjusting economic growth. Similar to pegged exchange rate countries, in the absence of this tool country must rely on other levers, such as fiscal policy and structural reforms. These tend to have long time lags.
Higher inflation cannot be solved through devaluation or monetary policy.
Cannot adopt QE as a result.
XR adjustment not possible. Demand for domestic exports would fall during high inflation, XR would depreciate, price competitiveness of exports would be restored. In Euro currency does not adjust and therefore there is an even larger fall in demand for exports. THE XR PROVIDES A MEANS OF RESTORING COMPETIITIVNESS OF EXPORTS, THIS IS LOST IN A SINGLE CURRENCY.
You cannot artificially depreciate your currency in order to boost trade performance, export led growth.
Benefits of joining the Eurozone - Strong and stable currency
Smaller nations who have volatile exchange rates means that foreign investors have little confidence in the currency.
Depreciations of currency causes uncertainty and loss of confidence in the UK, less investment, fall in economic growth. A currency union actually prevents this issue.
Greater certainty for firms, lower exchange rate risks.
Non fluctuating exchange rate means low risk, stable currency, foreign investors have high confidence. Business confidence is high, more investment and economic growth in the short and long run.
Importing/exporting firms can predict what import prices/export prices will be in the future therefore there is certainty over profits and investment.
If other nations trust your currency will hold its value its easier to involve yourself in international trade.
Costs of joining the Eurozone - Costs of convergence
Costs of convergence – Convergence criteria is unrealistic and restrictive. There have been periods when all EU countries broke these criteria. Low and stable inflation, small government budget deficit relative to GDP. UK currently exceeds all of this.
You cant leave easily – Greece experienced issues during the euro with huge recession. Costs of leaving the euro were too high. Instead they were forced to accept spending cuts. Little influence over economic policy.
No lender of last resort. In euro the ECB is unwilling to act as lender of last resort. Greater pressure on government and forces spending cuts, lower economic growth.
Benefits of joining the Eurozone - Price transparency and transaction costs
Beneficial for consumers, lower costs for currency conversion. Save money. Businesses save money, trading within the eurozone, remove cost of converting. Consumption in the domestic economy could increase as disposable incomes are higher.
Reduced transaction costs also encourage free trade with countries in the eurozone, economic growth.
Consumers and for businesses, easy to compare prices between countries. Greater price transparency. Very useful thing.
Benefits of EU enlargement for existing members - Greater free trade and trade creation
EU enlargement will mean that the market gets larger, greater economies of scale and competition, greater efficiency and lower prices.
Trade creation, more free trade, net welfare gain when trading with other countries. Export potential increases.
Benefits of EU enlargement for existing members - Free movement of labour
Increase in the supply of labour, greater pool of skilled workers and more flexible labour markets as a result. Aggregate supply could increase, long run economic growth.
There are now opportunities for British firms to import low-cost skilled labour in areas where there are labour shortages, it can help offset issues such as ageing populations and keep wage inflation low.
Costs of EU enlargement for existing members - Costs of free trade
Country with senile/infant industries, new countries with very large and successful industries may drive out domestic firms as they cannot compete with the new members.
Dumping?
There are extra budgetary costs for the EU financing programs, most of the new member states of the EU are relatively poor in terms of real GDP, for example Bulgaria and Romania joined in 2007, this means that UK spending on cohesion funds that target poor regions and countries would increase.
