IB Economics/International Economics/Economic integration

From Wikibooks, open books for an open world
Jump to: navigation, search

Economic Integration[edit]


  • Globalization- political, social, and economic integration.
  • Trading blocs: a large free trade area formed by tax, tariff, and trade agreements.
  • Free trade Areas: (NAFTA) a group of countries that agree to free trade.
  • Custom unions: A free trade area with a common external tariff (MERCOSUR)
  • Common markets: A custom union with free transport of goods and services amongst members. (European Union)

Full Integration: Common market with uniform fiscal and monetary policies. Often, a central bank is shared, and political unification exists as well.

  • Trade creation and trade diversion:
  • Trade creation: greater specialization according to comparative advantage
  • Trade diversion: Firms may have to pay more for products they would have paid less for.
  • Obstacles of achieving integration:
  • Reluctance to surrender political sovereignty
  • reluctance to surrender economic sovereignty
  • World Trade Organization
  • Aims: attempts to increase international trade by lowering trade barriers.
  • Success and failure viewed from different perspectives
  • Balance of Payments: Record of all financial dealings over a period of time between one country and the rest of the world. (Current account + capital account)
  • current account: Composed of the visible and invisible
  • balance of trade: Visible exports - visible imports
  • invisible balance: Invisible exports - invisible imports
  • capital account: Composed of profits, interest, dividends, and hot money.
  • Exchange Rates

An exchange rate is the value of one currency expressed in the value of another.

  • Fixed exchange rates: fixed exchange rates are exchange rates which the government sets.
  • Floating exchange rates: Exchange rates determined by the market forces of demand and supply.
  • Managed exchange rates: Exchange rates which are floating exchange rates but controlled by the government by influence.
  • Distinction between:
  • Depreciation and devaluation - When the value of a floating currency decreases, it means the currency has depreciated. When the value of a fixed currency is set at a lower value, it means it was devaluated.
  • Appreciation and revaluation - When the value of a floating currency increases, it means the currency has appreciated. When the value of a fixed currency is set at a higher value, it means it was revaluated.
  • Effects on exchange rates of
  • Trade flows: If there is a greater demand for a country's imports there is thus a greater demand for a country's currency and the value of that currency will rise.
  • Capital flow/ interest rate change: If interest rates rise, there will be a greater demand for a country's currency and thus it will appreciate.
  • Inflation: Inflation may cause a fall in the value of a country's currency.
  • Speculation: May do either.
  • Use of foreign currency reserves: A country will use its foreign currency reserves
  • relative advantage and disadvantages of fixed and floating exchange rates
  • A Floating exchange rate has it advantages because it automatically adjusts so that supply equals demand. There is no need for a central bank to keep foreign reserves. It prevents inflation. A government can pursue its own domestic policies.
  • Causes instability
  • May lead to inflation
  • Speculation can lead to major changes in the rate.
  • A Fixed exchange rate is advantageous because it provides stability, it can restrain domestic inflation, it can prevent inflation.
  • A government must have sufficient reserves, a country;s firms may be uncompetitive. The government must intervene as a priority.
  • Advantages and disadvantages of single currencies/monetary integration
  • Purchasing power parity theory (PPP): The theory that floating system currency adjusts until a unit of currency can buy the exactly the same amount of goods and services as a unit of another currency.