Advantage Disadvantage Free Trade Area Customs Union Single Market Economic Union Monetary Union

6 “Countries share the same currency and have a common monetary policy”. 10 “An agreement between two or more countries to abolish tariffs and quotas on trade between them”. 9 First stage of economic integration which begins to align the economies of countries. 8 “Centralising macroeconomic policies particularly in terms of fiscal policy”. 14 Weakest form of economic integration which is restricted to a limited range of goods and services. 15 Countries economies are bought closer together by restricting trade with non-members. Economic efficiency is increased through greater innovation and choice. 1 Price disparities between the member states narrow as common policies between key industries are agreed. 7 Structural and Regional unemployment can be created in certain countries and industry monopolies can begin to emerge. 3 Countries adopt a common approach to fiscal policy by limiting their budget deficit and national debt to GDP ratios. 11 Individual countries lose control over fiscal policy and their ability to increase spending to boost growth and implement their automatic stabilizers. 4 Trade diversion becomes apparent as export orders fall from countries outside the customs union whose own exports into the trading bloc have been restricted. 5 Interest rates are set by a single central bank and individual nations lose control over monetary policy. Countries can longer devalue their currency or set interest rates to suit their independent economic circumstances. 13 Exchange rate uncertainties are eliminated as well as currency transaction costs. Comparing prices between countries is straight forward. 2 “Two or more countries abolish tariffs on trade between them and place a common external tariff on trade with non members”. 12 “Removes non-tariff barriers to trade between countries and allows the free movement of labour and capital between countries”.

Advantage Disadvantage 1st Free Trade Area 10 “An agreement between two or more countries to abolish tariffs and quotas on trade between them”. 9 First stage of economic integration which begins to align the economies of countries. 14 Weakest form of economic integration which is restricted to a limited range of goods and services. 2nd Customs Union 2 “Two or more countries abolish tariffs on trade between them and place a common external tariff on trade with non members”. 15 Countries economies are bought closer together by restricting trade with non-members. Economic efficiency is increased through greater innovation and choice. 4 Trade diversion becomes apparent as export orders fall from countries outside the customs union whose own exports into the trading bloc have been restricted. 3rd Single Market 12 “Removes non-tariff barriers to trade between countries and allows the free movement of labour and capital between countries”. 1 Price disparities between the member states narrow as common policies between key industries are agreed. 7 Structural and Regional unemployment can be created in certain countries and industry monopolies can begin to emerge. 4th Economic Union 8 “Centralising macroeconomic policies particularly in terms of fiscal policy”. 3 Countries adopt a common approach to fiscal policy by limiting their budget deficit and national debt to GDP ratios. 11 Individual countries lose control over fiscal policy and their ability to increase spending to boost growth and implement their automatic stabilizers. 5th Monetary Union 6 “Countries share the same currency and have a common monetary policy”. 13 Exchange rate uncertainties are eliminated as well as currency transaction costs. Comparing prices between countries is straight forward. 5 Interest rates are set by a single central bank and individual nations lose control over monetary policy. Countries can longer devalue their currency or set interest rates to suit their independent economic circumstances.

Costs and benefits of regional trade agreements Trade creation from free trade within the trading bloc, ie a welfare gain for countries within the bloc Bigger market Economies of scale Jobs

Gains from trade creation S domestic P tariff S EU (France) + tariff A B C D P world = EU S EU (France) D domestic Q S2 FTA Q S1 with tariff Q D1 with tariff Q D2 FTA Higher Imports Eliminate tariffs, consumer surplus increased by A + B + C + D Producer surplus decreased by A, and government tax revenue falls by C Total welfare gain = B + D Imports have increased = trade is created

Trade diversion – loss in welfare Costs and benefits of regional trade agreements Trade diversion – loss in welfare

Trade diversion (UK) S domestic P w+tariff S world + tariff (NZ) A B C P FTA S FTA (France) E P W S world (NZ) D domestic Q S2 FTA Q S1 with tariff Q D1 with tariff Q D2 FTA Starting point is where all countries have tariffs on all imports. Analyse impact on the UK Cheapest world supplier was not EU but say New Zealand, represented by Sworld + tariff so price is Pw + tariff Creation of FTA, we now buy at PFTA from eg France, so consumer surplus increases by A+B+C+D Producer surplus falls by A, and we lose C + E in revenue from the tariff So welfare gain is B + D - E, so if E is greater than B + D there is an overall loss in welfare The loss in revenue will be greater the greater the original difference in prices between France and NZ

The costs and benefits of regional trade agreements, which are monetary unions transition costs (costs of changing price lists, slot machines, etc.) loss of independent monetary policy loss of exchange rate flexibility.

The costs and benefits of regional trade agreements, which are monetary unions elimination of transaction costs price transparency reduction in exchange rate uncertainty increased attractiveness for foreign direct investment (FDI)