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Final Exam Study Notes - Chapter 8-Regional Economics Integration

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University of Toronto Mississauga

MGT491 FINAL EXAM NOTES Chapter 8: Regional Economic Integration N Regional economic integration agreements among countries in a geographic region to reduce and ultimately remove tariff and nontariff barriers to the free flow of goods, services, and factors of production between countries. N Proliferation of regional trade blocs that promote regional economic integration is high in past 2 decades N Consistent with predictions of international trade theory and the theory of comparative advantage, agreements designed to promote freer trade within regions are believed to produce gains from trade for all member countries N GATT and WTO seek to reduce trade barriers N By entering into regional agreements groups of countries aim to reduce trade barriers more rapidly than can be achieved under the WTO N EU is the most successful regional economic integration o Single currency o 450 million consumers in the regional market o 25 countries N Similar moves elsewhere in the world NAFTA, one in south America (MERCOSUR), also in central America, southeast Asia, and parts of Africa N Move toward regional economic integration is generally seen as a good thing but some worry that it will lead to a world in which regional trade blocs compete against each other free trade would exist within each bloc but each will protect its market from outside competition with high tariffs Levels of Economic Integration N From least integrated to most integrated: o Free trade area o Customs union o Common market o Economic union o Full political union N Free trade area all barriers to the trade of goods and services among member countries are removed, no discriminatory tariffs, quotas, subsidies or administrative impediments are allowed to distort trade between members, each country is allowed to determine its own trade policies with regard to non-members, most popular form of regional economic integration (90% of regional agreements are of this type) o Most enduring free trade area in the world = European Free Trade Association (EFTA) Norway, Iceland, Liechtenstein, Switzerland Emphasis is on free trade in industrial goods, agriculture left out of the agreement Members free to determine the level of protection applied to goods coming from outside EFTA N Customs union one step further along the road to full economic and political integration eliminates trade barriers between member countries and adopts a common external trade policy, establishment of a common external trade policy necessitates significant administration to oversee trade relations with non-members, most countries that enter into a customs union desire even greater economic integration down the road o EU began as a customs union but now moved beyond this stage o Current customs unions incl. Andean Community (Bolivia, Colombia, Ecuador, Peru, Venezuela) free trade between member countries, imposes a common tariff of 5-20% on goods imported from outside N Common market no barriers to trade between member countries, common external trade policy, allows factors of production to move freely between members o Labour and capital are free to move because no restrictions on immigration, emigration, or cross- border flows of capital between member countries o Demands significant degree of harmony and cooperation on fiscal, monetary and employment policies o Achieving this degree of cooperation has proven very difficult EU functioned as a common market for many years but now moved beyond this stage N Economic union even closer economic integration and cooperation than a common market o Free flow of products and factors of production between member countries and the adoption of a common external trade policy, also requires a common currency, harmonization of tax rates, and a common monetary and fiscal policy o High degree of integration demands a coordinating bureaucracy and the sacrifice of significant amounts of national sovereignty to that bureaucracy o The EU is an economic union, although an imperfect one since not all members have adopted the same currency, and there are still differences in tax rates and regulations N The move toward economic union raises the issue of how to make a coordinating bureaucracy accountable to the citizens of member nations answer: through a political union N Political union the central political apparatus coordinates the economic, social, and foreign policy of the member states
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