Economic Integration

Process where countries coordinate and link their economic policies. As degree of integration increases, trade barriers decrease> fiscal/monetary policies becomes same.

• bilateral trade agreement: Agreement between two countries to reduce or remover tarrrifs or quotas on items
• Multilateral: between multiple countries.

Trading Blocs: group of countries that join together in some form of agrement to increase trade between them.

1. Preferencial Trading areas: PTA is a trading bloc that gives preferencial access to certain products by lowering trade barriers.
2. Free Trade areas: FTA is a group of countries that agree to trade freely to eliminate trade barriers between them. But no common external trade barriers. Creates a probem as products can enter the FTA vis the country with the least external trade barriersn hurting domestic production of other countries.
3. Customs Union: FTA+ common external trade barriers eliminating “rule of origin”. It could be difficult to agree on common.
4. Common Market: Customs union + free movement of FOS between countries.
5. Monetary union: Common Market+ a market with common currency and common central bank, monetary policy/ exchnage rate policy and coordination of macroeconomic goals. eg: EU

Advantages and Disadvantages of Monetary union

Advantages:

1. Exchange rate fluctuations between countries eliminated, lesser uncertainty> increase foreign trade and investment.> promotes consumption of imported goods.
2. Currency has enhanced credibility since used in a large zone> stability against speculation than individual currencies
3. greater business confidence> less perceived risk in trading> both internal growth and trade growth
4. Higher level of FDI since less currency risk> higher inward investment.
5. Low rates of inflation due to single central bank>greater investment> output