IB Economics HL 4.4 Economic Integration

[Maximum number: 25]

(a)

Explain how a free trade area is different from a common market.

[ 10 ]

(b)

Using real-world examples, evaluate the decision of a country to remain a member of a trading bloc.

[ 15 ]

Answers may include:
- Terminology: Trading bloc.
- Diagrams: AD/AS diagram to illustrate growth. Economies of scale to indicate falling costs with increased market size. Trade diagram illustrating the removal of restrictions to trade.
- Theory: Explanation of the impacts of a trading bloc on the economy in terms of employment, economic growth, trade creation, trade diversion and economies of scale.
- Synthesis (evaluate): Advantages including trade creation, greater access to markets, economies of scale. Freedom of movement of labour and greater employment opportunities, stability and cooperation, increased economic growth, greater consumer choice, increased competition, lower prices, improved efficiency. Disadvantages including trade diversion, impact on sovereignty, the effect on multilateral trade negotiations such as those of the WTO. Unemployment in less competitive member states. Candidates who cite the EU as an example may also consider arguments pertaining to membership in the Eurozone.
- Example(s): A relevant real-world example(s) of a country who is a member of a given trading bloc.

Assessment Criteria

Marks ..... Level descriptor
0:
- The work does not reach a standard described by the descriptors below.
1-3:
- The response indicates little understanding of the specific demands of the question.
- Economic theory is stated but it is not relevant.
- Economic terms are stated but they are not relevant.
- The response contains no evidence of synthesis or evaluation.
- A real-world example(s) is identified but it is irrelevant.
4-6:
- The response indicates some understanding of the specific demands of the question.
- Relevant economic theory is described.
- Some relevant economic terms are included.
- The response contains evidence of superficial synthesis or evaluation.
- A relevant real-world example(s) is identified.
7-9:
- The response indicates understanding of the specific demands of the question, but these demands are only partially addressed.
- Relevant economic theory is partly explained.
- Some relevant economic terms are used appropriately.
- Where appropriate, relevant diagram(s) are included.
- The response contains evidence of appropriate synthesis or evaluation but lacks balance.
- A relevant real-world example(s) is identified and partly developed in the context of the question.
10-12:
- The specific demands of the question are understood and addressed.
- Relevant economic theory is explained.
- Relevant economic terms are used mostly appropriately.
- Where appropriate, relevant diagram(s) are included and explained.
- The response contains evidence of appropriate synthesis or evaluation that is mostly balanced.
- A relevant real-world example(s) is identified and developed in the context of the question.
13-15:
- The specific demands of the question are understood and addressed.
- Relevant economic theory is fully explained.
- Relevant economic terms are used appropriately throughout the response.
- Where appropriate, relevant diagram(s) are included and fully explained.
- The response contains evidence of effective and balanced synthesis or evaluation.
- A relevant real-world example(s) is identified and fully developed to support the argument.

[Maximum number: 10]

Study the following extract and data and answer the questions that follow.
South Sudan joins the East African Community

(1) 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.

(2) 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.

(3) 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.

(4) 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.

(5) 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.

(6) 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.

(7) 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.

(8) 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.

$Figure 1: Intra-East African Community* trade in goods (USD\$bn)$

Figure 1: Intra-East African Community* trade in goods (USD\$bn)

*Burundi, Kenya, Rwanda, Tanzania and Uganda.
Not including South Sudan, which acceded to the treaty in 2016. London (June 9, 2016); paragraphs 4-8 adapted from a paper/article written by Astrid R.N. Haas (and co-authors) with funding from the International Growth Centre.
Graph: IMF, www.eacgermany.org, accessed 3 May 2018]

(a)

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

[ 2 ]

(b)

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.

[ 8 ]

Evaluate the likely impact on South Sudan of its membership of the EAC common market.

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.

Marking guidance:

Do not award beyond Level 2 if the answer does not contain reference to the information provided.

Level

Marks

0

The work does not meet a standard described by the descriptors below.

1

Few relevant concepts are recognized.

1-2

There is basic knowledge/understanding.

2

Relevant concepts are recognized and developed in reasonable depth.

3-5

There is clear knowledge/understanding.

There is some attempt at application/analysis.

3

Relevant concepts are recognized and developed in reasonable depth.

6-8

There is clear knowledge/understanding.

There is effective application/analysis.

There is synthesis/evaluation, supported by appropriate theory and evidence.

Command term
"Evaluate" requires candidates to make an appraisal by weighing up the strengths and limitations. Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument.

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.

Any reasonable evaluation.

[Maximum number: 2]

Study the following extract and answer the questions that follow.
Free Trade Agreement between the European Union and Indonesia

(1) The European Union (EU) and Indonesia are currently negotiating a free trade agreement (FTA). The agreement will aim to increase trade, avoid trade protection and expand foreign direct investment (FDI). Indonesia has the largest economy and population in Southeast Asia. The EU is Indonesia's third-largest trading partner.

(2) The FTA could see the clothing and footwear industry in Indonesia increase by over 10 %. However, the labour-intensive manufacturing industry has historically been known for poor working conditions and low wages. On the other hand, increased output could decrease the high unemployment in Indonesia (currently at 12 % ). The EU expects its car industry to benefit from the FTA. The agreement would encourage the EU to specialize in cars, and Indonesia to specialize in clothing, therefore both countries could benefit from comparative advantage.

(3) Since Indonesia's main competitors already have trade agreements with the EU, establishing an FTA is a priority for the Indonesian government. The EU has a potential market of 510 million consumers, and may offer areas for growth during a time of lower global trade and uncertainty due to the trade war between the United States and China.

(4) However, recent trade issues between the EU and Indonesia have slowed down negotiations. The EU announced that palm oil biodiesel is unsustainable and will phase these fuels out by 2030. Experts say that palm oil causes excessive deforestation and contributes to climate change. Indonesia is the world's largest exporter of palm oil.

(5) The EU has imposed tariffs on biodiesel exports from Indonesia, which may result in Indonesia losing a market worth over US$450 million. Palm oil represents 12% of Indonesia's total exports, contributes approximately 2.6 % to gross domestic product (GDP), and the industry employs more than 15 million people. The EU is Indonesia's largest palm oil customer. Additionally, some EU manufacturing businesses are unhappy with the tariffs as they rely on palm oil to produce their products, such as processed foods.

(6) In response, Indonesia filed a lawsuit with the World Trade Organization (WTO), stating that the EU's policy on biodiesel is unfair and is damaging the international image of palm oil. Indonesia claims it is committed to sustainable production practices and to protecting its forests.

(7) To make up for losing the EU's market, Indonesia is actively exploring other markets to boost its exports of palm oil. Other countries like China, India and Russia have a more relaxed policy on palm oil and have growing demand for it. Indonesia has also retaliated to the tariff through an investigation into whether EU dairy products exported to Indonesia benefited from subsidies, and has recommended a 20 %-25 % tariff on EU dairy products.

(8) However, the EU has tried to lower tensions by offering a US$17 million grant to improve trade conditions and capacity in preparation for the FTA. Experts have said that the FTA could support the development of legal and sustainable palm oil production through supporting good governance and capacity building. Indonesia has stated it would welcome help to decrease any market failure caused by palm oil.

State two functions of the World Trade Organization (WTO) (paragraph 6).

[Maximum number: 10]

Explain how a free trade area is different from a common market.

[Maximum number: 15]

Using real-world examples, evaluate the decision of a country to remain a member of a trading bloc.

Answers may include:
- Terminology: Trading bloc.
- Diagrams: AD/AS diagram to illustrate growth. Economies of scale to indicate falling costs with increased market size. Trade diagram illustrating the removal of restrictions to trade.
- Theory: Explanation of the impacts of a trading bloc on the economy in terms of employment, economic growth, trade creation, trade diversion and economies of scale.
- Synthesis (evaluate): Advantages including trade creation, greater access to markets, economies of scale. Freedom of movement of labour and greater employment opportunities, stability and cooperation, increased economic growth, greater consumer choice, increased competition, lower prices, improved efficiency. Disadvantages including trade diversion, impact on sovereignty, the effect on multilateral trade negotiations such as those of the WTO. Unemployment in less competitive member states. Candidates who cite the EU as an example may also consider arguments pertaining to membership in the Eurozone.
- Example(s): A relevant real-world example(s) of a country who is a member of a given trading bloc.

Assessment Criteria

Marks ..... Level descriptor
0:
- The work does not reach a standard described by the descriptors below.
1-3:
- The response indicates little understanding of the specific demands of the question.
- Economic theory is stated but it is not relevant.
- Economic terms are stated but they are not relevant.
- The response contains no evidence of synthesis or evaluation.
- A real-world example(s) is identified but it is irrelevant.
4-6:
- The response indicates some understanding of the specific demands of the question.
- Relevant economic theory is described.
- Some relevant economic terms are included.
- The response contains evidence of superficial synthesis or evaluation.
- A relevant real-world example(s) is identified.
7-9:
- The response indicates understanding of the specific demands of the question, but these demands are only partially addressed.
- Relevant economic theory is partly explained.
- Some relevant economic terms are used appropriately.
- Where appropriate, relevant diagram(s) are included.
- The response contains evidence of appropriate synthesis or evaluation but lacks balance.
- A relevant real-world example(s) is identified and partly developed in the context of the question.
10-12:
- The specific demands of the question are understood and addressed.
- Relevant economic theory is explained.
- Relevant economic terms are used mostly appropriately.
- Where appropriate, relevant diagram(s) are included and explained.
- The response contains evidence of appropriate synthesis or evaluation that is mostly balanced.
- A relevant real-world example(s) is identified and developed in the context of the question.
13-15:
- The specific demands of the question are understood and addressed.
- Relevant economic theory is fully explained.
- Relevant economic terms are used appropriately throughout the response.
- Where appropriate, relevant diagram(s) are included and fully explained.
- The response contains evidence of effective and balanced synthesis or evaluation.
- A relevant real-world example(s) is identified and fully developed to support the argument.

[Maximum number: 2]

Study the following extract and data and answer the questions that follow.
South Sudan joins the East African Community

(1) 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.

(2) 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.

(3) 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.

(4) 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.

(5) 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.

(6) 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.

(7) 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.

(8) 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.

$Figure 1: Intra-East African Community* trade in goods (USD\$bn)$

Figure 1: Intra-East African Community* trade in goods (USD\$bn)

*Burundi, Kenya, Rwanda, Tanzania and Uganda.
Not including South Sudan, which acceded to the treaty in 2016. London (June 9, 2016); paragraphs 4-8 adapted from a paper/article written by Astrid R.N. Haas (and co-authors) with funding from the International Growth Centre.
Graph: IMF, www.eacgermany.org, accessed 3 May 2018]

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

[Maximum number: 10]

With the aid of a diagram, explain the potential trade gains and trade losses arising from the formation of a customs union.

Candidates may include:
- a definition of a customs union
- explanation of potential gains:
- benefits of specialization according to comparative advantage
- more competition
- economies of scale
- lower prices
- improved product quality
- increased efficiency
- trade creation
- increased output and economic growth
- impact on resource allocation
- explanation of potential losses
- unequal distribution of gains
- inferior to global free trade
- lower output and increases in unemployment due to closure of inefficient producers
- trade diversion
- diagram showing elimination of protectionist measures (tariff, quota or subsidy) leading to increased imports
- diagram showing increased protectionist measures (tariff, quota or subsidy) toward non-member countries, leading to a fall in imports
- AD/AS diagram illustrating economic growth arising from trade gains and reflected in an increase in AD
- diagram showing comparative advantage.

Examiners should be aware of the limited time available to candidates when marking responses to this question.

Candidates who incorrectly label diagrams cannot be rewarded with full marks.
Examiners should be aware that candidates may take a different approach which if appropriate, should be rewarded.

Assessment Criteria
0 Completely inappropriate answer. ..... 0
1 Little understanding of the specific demands of the question. Very little recognition of relevant economic theory. Relevant terms not defined.
Significant errors. ..... 1-3
2 Some understanding of the specific demands of the question. Some recognition of relevant economic theory. Some relevant terms defined.
Some errors. ..... 4-6
3 Understanding of the specific demands of the question. Relevant economic theory explained and developed. Relevant economic terms defined.
Few errors.
Where appropriate, diagrams included. ..... 7-8
4 Clear understanding of the specific demands of the question. Relevant economic theory clearly explained and developed. Relevant economic terms clearly defined.
No major errors.
Where appropriate, diagrams included and explained.
Where appropriate, examples used. ..... 9-10

[Maximum number: 15]

Using real-world examples, discuss whether a country would benefit from joining other countries in a monetary union.

Answers may include:
- Terminology: monetary union.
- Diagram: AD/AS diagrams to illustrate the impacts of monetary union membership on the economy, trade protection diagram, which identifies the advantages and disadvantages of monetary union membership, PPC diagram, or any other relevant diagram.
- Theory: may include consideration of the benefits arising from monetary union membership, including greater access to markets, free movement of labour and greater employment possibilities, stronger bargaining power at the global level, and reduced uncertainty over the exchange rate.
- Synthesis (discuss): costs of monetary union membership, including the loss of independent monetary policy, loss of exchange rate policy, restricted independence over fiscal policy, loss of sovereignty, and challenge to multilateral trading negotiations. Consideration of whether the benefits outweigh the costs of monetary union membership;
a consideration that some members of the monetary union may experience more benefits/costs from monetary union membership than other members. Overall assessment.
- Example(s): candidates are likely to consider the European Union (EU).

Assessment Criteria

Marks

Level descriptor

0

- The work does not reach a standard described by the descriptors below.

1-3

- The response indicates little understanding of the specific demands of the question.

- Economic theory is stated but it is not relevant.

- Economic terms are stated but they are not relevant.

- The response contains no evidence of synthesis or evaluation.

- A real-world example(s) is identified but it is irrelevant.

4-6

- The response indicates some understanding of the specific demands of the question.

- Relevant economic theory is described.

- Some relevant economic terms are included.

- The response contains evidence of superficial synthesis or evaluation.

- A relevant real-world example(s) is identified.

7-9

- The response indicates understanding of the specific demands of the question, but these demands are only partially addressed.

- Relevant economic theory is partly explained.

- Some relevant economic terms are used appropriately.

- Where appropriate, relevant diagram(s) are included.

- The response contains evidence of appropriate synthesis or evaluation but lacks balance.

- A relevant real-world example(s) is identified and partly developed in the context of the question.

10-12

- The specific demands of the question are understood and addressed.

- Relevant economic theory is explained.

- Relevant economic terms are used mostly appropriately.

- Where appropriate, relevant diagram(s) are included and explained.

- The response contains evidence of appropriate synthesis or evaluation that is mostly balanced.

- A relevant real-world example(s) is identified and developed in the context of the question.

13-15

- The specific demands of the question are understood and addressed.

- Relevant economic theory is fully explained.

- Relevant economic terms are used appropriately throughout the response.

- Where appropriate, relevant diagram(s) are included and fully explained.

- The response contains evidence of effective and balanced synthesis or evaluation.

- A relevant real-world example(s) is identified and fully developed to support the argument.

IB Economics HL 4.4 Economic Integration Questions

Exam points

Covered syllabus points

Covered syllabus points

Question 1

Question (a)

Question (b)

Question 2

Question (a)

Question (b)

Question 3

Question 4

Question 5

Question 6

Question 7

Question 8