Economic integration Paper 2| IBDP Economics HL |

IBDP Economics HL – The global economy – Economic integration -Paper 2 Exam Style Practice Questions

Economic integration Paper 2?

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South Sudan joins the East African Community

The East African Community (EAC) is the most integrated trading bloc in Africa. In 2005, the members established a customs union, and then in 2010 it became a common market. There are ambitious plans to establish a monetary union by 2024.
According to a recent report, the region is wealthier and more peaceful as a result of the increased integration. Economic models suggest that bilateral trade between member countries was 213 % higher in 2011 than it would have been without the integration. This is despite the fact that progress on fully eliminating trade barriers has been rather slow and there are still a large number of non-tariff barriers.
Until recently the customs union was made up of Burundi, Kenya, Rwanda, Tanzania and Uganda. Very recently, South Sudan joined the bloc. This presents a tremendous opportunity for South Sudan, which was recently recognized as an independent country.
South Sudan is one of many developing countries that are dependent on oil exports for the majority of its export revenues and oil prices have been falling due to increased supply of oil in the market. The deteriorating terms of trade have resulted in a worsening of the current account and lower government revenues. Regional economic integration might help South Sudan to diversify its economy.
Agriculture is one potential area that South Sudan could focus on to diversify its economy. According to some estimates, 70 % of land is suitable for agriculture, but less than 4 % is currently being cultivated. The large flood plains in the country are suitable for rice production and the hope is that South Sudan can develop a comparative advantage in this essential food.
South Sudan is landlocked and most of its road network is unpaved. This is just one example of its poor infrastructure. Since infrastructure is an expensive investment, regional cooperation will be vital for improving its road systems. Furthermore, effective transport links to sea ports in Kenya and Tanzania will allow for greater trade and therefore economies of scale.
In the short term, there will be challenges for South Sudan associated with joining the common market. For example, before Rwanda joined the EAC in 2007, there were lower tariffs on many imported inputs. However, the cost of living for the poor population rose because of trade diversion that occurred after joining the EAC. South Sudan is likely to face the same problem.
Labour costs in South Sudan are higher than those of other member countries and years of conflict have left the population with low levels of education and skills. This may present a barrier for South Sudan in attracting foreign direct investment, despite being part of the common market.

Question

Define the term monetary union indicated in bold in the text (paragraph [1]).

▶️Answer/Explanation

Where countries share a common currency plus one of the following

member of a common market
have a common central bank

South Sudan joins the East African Community

The East African Community (EAC) is the most integrated trading bloc in Africa. In 2005, the members established a customs union, and then in 2010 it became a common market. There are ambitious plans to establish a monetary union by 2024.
According to a recent report, the region is wealthier and more peaceful as a result of the increased integration. Economic models suggest that bilateral trade between member countries was 213 % higher in 2011 than it would have been without the integration. This is despite the fact that progress on fully eliminating trade barriers has been rather slow and there are still a large number of non-tariff barriers.
Until recently the customs union was made up of Burundi, Kenya, Rwanda, Tanzania and Uganda. Very recently, South Sudan joined the bloc. This presents a tremendous opportunity for South Sudan, which was recently recognized as an independent country.
South Sudan is one of many developing countries that are dependent on oil exports for the majority of its export revenues and oil prices have been falling due to increased supply of oil in the market. The deteriorating terms of trade have resulted in a worsening of the current account and lower government revenues. Regional economic integration might help South Sudan to diversify its economy.
Agriculture is one potential area that South Sudan could focus on to diversify its economy. According to some estimates, 70 % of land is suitable for agriculture, but less than 4 % is currently being cultivated. The large flood plains in the country are suitable for rice production and the hope is that South Sudan can develop a comparative advantage in this essential food.
South Sudan is landlocked and most of its road network is unpaved. This is just one example of its poor infrastructure. Since infrastructure is an expensive investment, regional cooperation will be vital for improving its road systems. Furthermore, effective transport links to sea ports in Kenya and Tanzania will allow for greater trade and therefore economies of scale.
In the short term, there will be challenges for South Sudan associated with joining the common market. For example, before Rwanda joined the EAC in 2007, there were lower tariffs on many imported inputs. However, the cost of living for the poor population rose because of trade diversion that occurred after joining the EAC. South Sudan is likely to face the same problem.
Labour costs in South Sudan are higher than those of other member countries and years of conflict have left the population with low levels of education and skills. This may present a barrier for South Sudan in attracting foreign direct investment, despite being part of the common market.

Question

Using a cost diagram, explain how membership in the common market may allow producers in South Sudan to gain economies of scale (paragraph [6]).

▶️Answer/Explanation

For drawing a cost diagram showing a LRAC with two points indicating a fall in average costs at a higher level of output.

AND
For an explanation that as South Sudan has access to a larger market, it will allow its producers to operate at a higher level of output resulting in economies of scale and a fall in LRAC/AC.

South Sudan joins the East African Community

The East African Community (EAC) is the most integrated trading bloc in Africa. In 2005, the members established a customs union, and then in 2010 it became a common market. There are ambitious plans to establish a monetary union by 2024.
According to a recent report, the region is wealthier and more peaceful as a result of the increased integration. Economic models suggest that bilateral trade between member countries was 213 % higher in 2011 than it would have been without the integration. This is despite the fact that progress on fully eliminating trade barriers has been rather slow and there are still a large number of non-tariff barriers.
Until recently the customs union was made up of Burundi, Kenya, Rwanda, Tanzania and Uganda. Very recently, South Sudan joined the bloc. This presents a tremendous opportunity for South Sudan, which was recently recognized as an independent country.
South Sudan is one of many developing countries that are dependent on oil exports for the majority of its export revenues and oil prices have been falling due to increased supply of oil in the market. The deteriorating terms of trade have resulted in a worsening of the current account and lower government revenues. Regional economic integration might help South Sudan to diversify its economy.
Agriculture is one potential area that South Sudan could focus on to diversify its economy. According to some estimates, 70 % of land is suitable for agriculture, but less than 4 % is currently being cultivated. The large flood plains in the country are suitable for rice production and the hope is that South Sudan can develop a comparative advantage in this essential food.
South Sudan is landlocked and most of its road network is unpaved. This is just one example of its poor infrastructure. Since infrastructure is an expensive investment, regional cooperation will be vital for improving its road systems. Furthermore, effective transport links to sea ports in Kenya and Tanzania will allow for greater trade and therefore economies of scale.
In the short term, there will be challenges for South Sudan associated with joining the common market. For example, before Rwanda joined the EAC in 2007, there were lower tariffs on many imported inputs. However, the cost of living for the poor population rose because of trade diversion that occurred after joining the EAC. South Sudan is likely to face the same problem.
Labour costs in South Sudan are higher than those of other member countries and years of conflict have left the population with low levels of education and skills. This may present a barrier for South Sudan in attracting foreign direct investment, despite being part of the common market.

Question

Using information from the text/data and your knowledge of economics, evaluate the likely impact on South Sudan of its membership of the EAC common market.

▶️Answer/Explanation

Answers may include:

definition of economic integration
definition of common market.

Advantages/opportunities of economic integration:

larger export markets, may allow South Sudan producers to gain economies of scale, as noted in part (c). In the market for rice, this may allow South Sudan to develop a comparative advantage (paragraph [5])
larger market may encourage diversification, and reduce South Sudan’s reliance on oil
further stimulus for foreign direct investment as foreign companies will benefit from the larger market size; however, this may be limited by the low levels of human capital and high production costs (paragraph [8])
opportunities to South Sudan workers who, with free movement of labour, may work in other East African countries
advantages to South Sudan companies who, with free movement of capital, may invest in other East African countries
cost of imported factors of production may decrease
South Sudan can gain from the rapidly growing trade within the trading bloc (graph)
greater political stability and cooperation, (paragraph [2]) may also result in higher levels of investment, leading to economic growth
trade creation will benefit producers who can import inputs without tariffs (paragraph [7])
greater efficiency as domestic producers will have to compete with lower priced imports from other member countries
consumers may have access to less expensive imported goods and services. However, this might be limited if trade diversion takes place and the new common external tariff makes some imported products more expensive
bargaining power of South Sudan in multilateral trade negotiations can improve if it is part of the larger trading bloc
economic integration can result in greater peace.

Disadvantages/challenges of economic integration:

trade diversion (paragraph [7])
the role of the WTO might be undermined, since it allows East African Countries to look inwards
trade becomes more complicated with a series of intra-trading bloc agreements
unemployment, as less efficient South Sudan companies (with higher labour costs, paragraph [8]), can’t compete with lower priced imports from other member countries
any potential new trade agreements with non-members may be restricted by common external tariffs
the larger the group the more difficult it is to come to agreements.

The Comprehensive and Progressive Agreement for Trans-Pacific
Partnership (CPTPP), Australia and Japan

In 2018, Australia signed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)*. The agreement creates the third largest free trade area in the world, covers nearly 500 million people and is worth more than US$$$12 trillion. The members of the agreement have stated that economic integration and free trade is important to help foster good political relations and inclusive growth for all nations.
The trade agreement will aim to gradually eliminate most trade protection within the member countries. The agreement will see tariffs eliminated for Australian cheese and beef exports to Japan, and increased quotas for the export of rice to Japan from 4400 to 8400 tonnes. Nikkei Asian Review reported that “Fast-food restaurants in particular are embracing the import as a way to cut costs to cope with rising wages.” Additionally, Japanese food manufacturers will be able to lower production costs for rice-based meals and benefit from increased stability of input prices. The benefits from the agreement for Japan’s economy are projected to exceed US$$$70 billion, but some industries would be negatively affected.
Japanese farmers are worried about the increase in imported food from Australia. Furthermore, the Japanese government is concerned about the effects of the CPTPP on Japan’s food self-sufficiency—Japan relies on other countries for over 60 % of its food. In response to these concerns the Japanese government has offered support for domestic farmers to diversify production into other crops. The government also plans to subsidize the rice farmers through the initial phase of lowering trade barriers.
The agreement is said to be worth more than US$$$37 billion to Australian agricultural exports. It is hoped that CPTPP and the falling value of the Australian dollar will help Australia to reduce its current account deficit, but some economists have argued that this can take a long time. According to some estimations, the short-run price elasticity of demand (PED) for Australian exports is 0.2 and the short-run PED for imports in Australia is 0.4. However, the long-run PED for Australian exports is 1.1 and the long-run PED for imports in Australia is 1.3.
There have also been concerns about the CPTPP from trade unions in Australia. They argue that it deregulates the labour markets and gives corporations from other countries an ability to take legal action against governments for implementing laws that raise wages or protect the environment, if the foreign corporation can prove that the law hurt their commercial interests. One university lecturer said that the future costs to the taxpayer could be significant if foreign companies take the Australian government to court.
The trade agreement would allow workers from other countries to work in Australia without employers being required to check if Australian citizens are available to fill the jobs before the migrant workers are employed. It is estimated this may risk 39 000 jobs in Australia. Furthermore, environmental activists have expressed concerns that the negative environmental and social effects of the agreement have not been well considered. This may lead to conflicts with Australia’s commitment to the United Nations’ Sustainable Development Goals.

Question

Define the term free trade area indicated in bold in the text (paragraph [1]).

▶️Answer/Explanation

A type of trading bloc where the member countries agree to eliminate trade barriers among them, but each country retains the right to have its own trade policies/barriers/protection with non-members.

Filipino rice farmers prepare for trade liberalization

To meet its obligations under World Trade Organization (WTO) rules, the president of the Philippines has asked the government to eliminate the current quota system for rice imports. As an important part of food security measures, the government wants to achieve self-sufficiency in the production of rice. To support this goal, the WTO allowed the Philippines to extend its rice quota until June 2017 to allow more time for local farmers to prepare for free trade.
The current quota system for rice imports makes domestic prices rise dramatically during periods of low domestic supply.
Eliminating the quota on rice aims to make the rice market more competitive, which could reduce the price of rice by as much as 7 Philippine pesos (PH₱) per kilogram (kg). The National Economic and Development Authority has estimated that lower rice prices could save Filipino households as much as PH₱2362 per year. However, if the rice quota is eliminated, economists have warned that the government must prepare local rice producers so that they can either compete with rice imports or move to producing other crops. “Currently Filipino farmers cannot compete with Vietnamese farmers who may enjoy economies of scale” declared one economist. “The solution is to bring down the cost of production of rice.”
To help Filipino farmers to adjust to competition from lower-priced rice imports, the government has allocated funds to the Rice Competitiveness Enhancement Fund. This fund will provide support to farmers in order to increase productivity by supplying high-yield seeds and fertilizer. It will also provide subsidies to encourage the use of agricultural machinery and will offer support services and training to farmers.
Apart from being an essential food for many Filipinos, rice is also an important input for the food industry. The plan to remove the import quota will reduce the inflation rate in the Philippines by up to 0.4 %. In July 2018, the central bank governor reported that inflation had reached 5.7 %, well above the government’s target range of 2 % to 4 %. He stated that “supply-side factors are the main drivers of the present inflation. These factors include rising international oil prices, higher indirect taxes and poor weather conditions that have affected food supply”. The president stated that the removal of the rice quota was one solution to ease the rising inflation.

Question

State two functions of the World Trade Organization (WTO) (paragraph [1]).

▶️Answer/Explanation

A clear understanding demonstrated by listing two of the following functions of the WTO for its member countries:

to set and enforce rules for international trade
to provide a forum for negotiating trade liberalization
to monitor further trade liberalization
to resolve trade disputes
to increase the transparency of decision-making processes
to cooperate with other major international economic institutions
to help developing countries benefit fully from the global trading system.

Economic integration Paper 2?

IBDP Economic HL- All Topics

Exam Style Question for IBDP Economics HL- Economic integration -Paper 2