Economic Integration

• A Free Trade Area is when a group of countries agree to remove barriers to trade between members
• A Customs Union both eliminates barriers to trade between countries and also has a common external tariff against non-member states
• Customs Union benefits and limitations:

  
• Trade creation occurs when a customs union results in high-cost domestic production being replaced by imports from a more efficient source within the customs union
• Trade diversion occurs when a customs union results in trade switching from a low-cost supplier outside the customs union to a less efficient source within the customs union
• Impacts of a monetary union:

  • Reduced transaction costs
  • Elimination of exchange rate risk
  • Price transparency
  • Monetary efficiency gain
  • Price stability
• Costs of membership of a monetary union:

  • Loss of monetary policy sovereignty
  • Constraint on fiscal policy
  • Need for fiscal transfers
  • Deflationary bias
  • Transition costs
• Different stages of economic integration: