Revision Lecture 2013/14 EC329 – Economics of the European Union Tim Hatton/Holger Breinlich University of Essex

Revision Lecture Outline A bit of advice on how to prepare for the exam. Three questions from past exams, one from each of the last three years. Questions?

How to prepare for the exam Read the lecture notes (and essential readings if necessary). The introductory and concluding slides (“Plan of the Talk”, “Overview of Lecture”, “Concluding Wrap-Up”, “Summary and Learning Outcomes”, etc.) state the main objectives of the lecture. Make sure you have something to say about each of them! Redo the class exercises and the mock exam. Have a look at the exams from the last seven years (from 2007). This year’s exam will follow a similar format.

How to do the Exam Make sure you are answering the question asked, not some related question. Use the material you have learned. Apply the relevant economic concepts/theory, where appropriate. Use appropriate diagrams to illustrate you answer. Allocate your time optimally. Remember that there are diminishing returns to time spent on a question. Check that you have answered all parts of the question (roughly in proportion to the relative weight of each part). If you have time left at the end, don’t get up and leave. Use the time to make sure your answers are clear, legible and that they are in fact answers to the questions asked.

2012 Exam – Question 3 The New Economic Geography (NEG) analyses how the interaction of agglomeration and dispersion forces can explain the location of economic activity. Answer all parts a), b) and c) of this question. [25 marks] Assume that firms and labour can move freely across the two regions A and B of a country. Also assume that region B is larger in the sense that it has more consumers and thus a higher total demand for firms’ products. There are no other agglomeration forces at work. Also assume that competition from other firms is the only potential dispersion force that is active. Use a simple NEG model to explain why a decrease in trade costs between the regions will tend to reinforce the relocation of industry to region B.

2012 Exam – Question 3 (cont.) The New Economic Geography (NEG) analyses how the interaction of agglomeration and dispersion forces can explain the location of economic activity. Answer all parts a), b) and c) of this question. … [15 marks] Now assume that the relocation of firms from A to B further increases demand in region B (e.g., because these firms demand intermediate inputs or because of the salaries they pay to their workers). How would the model in a) have to be modified to take this additional agglomeration force into account? Will there be more or less agglomeration? Explain. [10 marks] In reality, economic activity is not fully concentrated in a single region or country. What forces apart from competition lead to a dispersion of activity across regions and countries?

Question 3 – Answers, 3a Strength of forces Q Agglomeration force EU demand Dispersion force with freer trade A E E’ S 1/2 S’ B 1 Share of firms in big region

Question 3 – Answers, 3b Strength of forces Q Agglomeration force EU demand Dispersion force with freer trade A E E’ S 1/2 S’ B 1 Share of firms in big region Agglomeration force (2)

Question 3 – Answers, 3c) Examples of dispersion forces: (Competition with other firms) Rents and land prices (City of London vs. Docklands) High cost of other non-traded services

Last Year’s Exam, Q 5 5. Answer both parts a) and b) of this question. (a) [30 marks] Outline and explain the six optimum currency area criteria which can help countries decide whether or not to form a monetary union. (b) [20 marks] Should fiscal policy be subjected to some form of collective control in a monetary union? Discuss.

Asymmetric Shocks

Question 5--Answer 5a OCA criteria (economic and political) Labour mobility—response to asymmetric shocks (Mundell) Production diversification—correlated shocks (Kenen) Openness—economic integration, product market adjustment (McKinnon) Fiscal transfers—coping with asymmetric shocks. Homogenous preferences—consensus on monetary policy (symmetric shocks) Solidarity vs Nationalism—ability (political will) to tolerate unequal outcomes of aymmetric shocks.

Question 5 Answer 5b Members of the Euro have a common monetary policy but not a common fiscal policy. The Stability and Growth Pact provided some fiscal discipline—sanctions for deficits >3% of GDP. Breached early on and especially after the GFC. Fiscal transfers could not be done through the EU budget, which is too small. So reinforce or renew the SGP (1997, 2005, 2011)? Limits fiscal response to a common shock like the GFC. Need greater solidarity for inter-country transfers. 2011 effectively targets the debt/GDP ratio. Maybe use structural budget deficits as the criterion.

2011 Exam Question 4a 4. Answer all parts (a), (b) and (c) of this question: (a) [25 marks] Using an appropriate diagram with two countries (A and B), explain the effects of the migration of workers from country A to country B on wages, producer surplus, and overall welfare in each of the two countries. Assume that workers from the two countries are perfect substitutes in production.

2011 Exam Question 4b,c (b) [15 marks] Discuss how realistic the assumption of perfect substitutability is. In your answer, make sure you discuss the concepts of substitutability and complementarity of domestic and migrant workers, and give appropriate examples. (c) [10 marks] How would the results from a) change if workers from the two countries were compliments rather than substitutes in production?

Effects of migration

2011 Q 4--Answer 4a) The wage falls in 1 and rises in 2; producer surplus rises in 1 by A + B and falls in 2 by D + F; welfare gain is B in country 1 and C in country 2 (the migrants gain C+D but the non-migrants in 2 lose D). Note that all this assumes full employment; the welfare gains are the result of wage adjustments. As a result there are losers and gainers. 4b) Perfect substitutability is a strong assumption. Some workers are close substitutes (e.g. unskilled labour) others less so, the skilled especially those with specialised skills.

4c) If foreign workers are complementary then immigration could raise the wage of non-immigrants. If foreign workers are skilled then immigration would reduce the wage for native skilled. It would increase the wage for the unskilled, essentially by shifting the demand curve for unskilled labour to the right.

Questions? Any other questions?