IB Economics 4.4 Economic integration

Practise explaining how customs unions, monetary unions and WTO rules affect trade, policy choices and member economies in IB Economics SL questions.

Covered syllabus points

4.4.1—Preferential trade agreements 4.4.2—Trading blocs 4.4.3—Advantages of trading blocs 4.4.4—Disadvantages of trading blocs 4.4.5—Monetary union 4.4.6—World Trade Organization

[Maximum number: 15]

Read the extracts and answer the questions that follow.
Text A — Overview of North Macedonia

(1) North Macedonia is a small, landlocked nation that shares borders with five countries, including Bulgaria and Greece. Bulgaria and Greece are members of the European Union (EU) common market, which North Macedonia hopes to join soon. Since the country began negotiating for EU membership, trade with the EU has increased rapidly and now accounts for 75 % of North Macedonia's exports and 62 % of its imports.

(2) Despite its small market, with a population of approximately 2 million, North Macedonia's proximity to the EU, low wages and expected entry into the common market have attracted foreign investors. Greece, its richest neighbour, was its third highest source of foreign investment in 2019. The lower cost of living also appeals to Greek tourists.

(3) EU companies have invested in the financial, telecommunication, energy and food processing industries in North Macedonia. Many of the most profitable companies are from the EU. If EU membership is granted, foreign direct investment (FDI) inflows may increase as firms located in North Macedonia will be allowed to bypass all custom checks and enjoy tariff-free trade within the common market. One particular challenge for North Macedonia, however, is that most of the profits of foreign companies are likely to be repatriated (sent back to the companies' home countries).

(4) In 2018, North Macedonia's export revenue was US $\$ 7.57$ billion and its import expenditure was US$9.56 billion. The country's main exports are iron and steel, clothing and accessories, and food products. Food, livestock and consumer goods account for 33 % of imports while the remainder are machinery, petroleum and other materials needed for the industrial production process.

(5) The manufacturing sector, which now employs 31 % of the labour force, has gained more importance. The agricultural sector remains strong, contributes over 10 % of North Macedonia's gross domestic product (GDP) and employs about 16 % of the country's workforce.

(6) The unemployment rate decreased from over 30 % in 2010 to 17.3 % in 2019. However, youth unemployment is almost 40 %. Over 20 % of the population lives below the poverty line. Unemployment and poverty contribute to high rates of emigration. More than 20 % of the North Macedonian population have emigrated since 1994, mostly to the EU. As a member of the EU, North Macedonia will enjoy free movement of labour which will make it easy for its citizens to live and work in other EU countries.
Text B - North Macedonia's economic reforms

(1) To be considered for EU membership, North Macedonia implemented a series of supply-side policies to reform its economy. The EU imposes strict requirements for membership but provides financial assistance to countries preparing for membership. North Macedonia has received 633 million euros (the currency of the EU) to help with the reforms.

(2) Most of the supply-side policies seek to improve the international competitiveness of North Macedonia's industries. The authorities are increasing access to education and training for workers. The expansion of the transport network and other infrastructure is also expected to increase efficiency.

(3) Protection of the environment is also on the list of requirements for EU membership. North Macedonia aims to reduce its dependence on coal and to instead promote the use of solar, wind and hydropower technologies. These low-carbon energy sources would help decrease its air pollution, which is among the worst in Europe.

(4) The reforms, which started in 2014, have shown progress. Exports and manufacturing output are more diversified and more concentrated on high-value products. To attract FDI, North Macedonia maintains one of the lowest tax rates on corporate income in the region. The central bank also prevents the denar (North Macedonia's currency) from appreciating against the euro through managing foreign reserves. However, skill shortages and a mismatch of skills with those required by companies discourage foreign firms from investing. Important investment gaps in public infrastructure also remain.
Text C - North Macedonia's trade agreements
North Macedonia participates in five free trade agreements (FTAs), that together cover 95 % of its exports and 78 % of its imports. Most of its trade with the EU is already free but imports of wine, beef and fish products are still subject to quotas. North Macedonia is currently a net importer of agricultural and food products. All protectionist measures on EU products would be removed upon entry into the common market.

Table 1: Consumer Price Index (CPI) for North Macedonia (base year = 2010)

Table 2: Economic data for North Macedonia

Using information from the texts/data and your knowledge of economics, discuss the likely economic effects on North Macedonia of its entry into the European Union (EU) Common Market.

Level

Marks

0

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

1

- 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.

- The response contains no use of text/data.

1-3

2

- 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.

- The response contains limited use of text/data.

4-6

3

- 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.

- The response includes some relevant information from the text/data.

7-9

4

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

- Relevant economic theory is explained.

- Relevant economic terms are used appropriately.

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

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

- The use of information from the text/data is generally appropriate, relevant, and applied correctly.

10-12

5

- 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.

- The use of information from the text/data is appropriate, relevant, and is used to formulate a reasoned argument supported by analysis/evaluation.

13-15

Command term
"Discuss" requires candidates to offer a considered and balanced review that includes a range of arguments, factors, or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.

Responses may include:
- The impact on the unemployment rate may be mixed:
- it could be argued that the inflows of FDI (Text A, paragraph 2; Table 2) and greater exports to the EU could lead to job creation.
- The lower wages may attract EU firms which may help reduce the high unemployment rate (Text A, paragraph 6; Table 2).
- Jobs may be lost in the agricultural sector (Text C) which still employs 16\% of the population (Text A, paragraph 5).
- Funds from the EU have helped increase access to education and workers' training which could help reduce the skills mismatch (text B, paragraph 4) and hence reduce the high (structural) unemployment rate (Text A, paragraph 6).
- The impact on economic growth:
- the increase in trade could close the current account (balance of trade) deficit (Table 2, answer to b(ii)), lead to increase in AD and hence actual growth.
- more trade may raise efficiency in North Macedonia through increased competition, economies of scale from larger markets, and improved resource allocation
- it could be argued that trade may not increase significantly since North Macedonia is already enjoying free trade with the EU over most goods and services (Text C).
- as North Macedonia currently suffers a deficit in the balance of trade (Text A, paragraph 4, answer to b(ii)) and a current account deficit (Table 2), the removal of quotas may worsen its balance of trade position and could lead to a fall in AD.
- the various supply-side policies needed to meet the requirements for EU membership have allowed potential growth and kept the inflation rate low (Table 1).
- the net FDI inflow throughout the 4-year period (Table 2) reflects potential growth.
- Access to seaports would be easier since North Macedonia is landlocked (Text A, paragraph 1). This would further attract investment.
- The free movement of labour which comes with the common market may worsen the emigration problem and contribute to a 'brain drain' problem (Text A, paragraph 6).
- The EU is providing North Macedonia with financial assistance to finance supply

side policies, which will allow them to become more globally competitive (Text B, paragraph 1).
- Increased trade with the EU has allowed for diversification (Text B, paragraph 4) and the growth of the manufacturing sector (Text A, paragraph 5).
- Once North Macedonia no longer receives financial assistance from the EU, it may have difficulties financing government expenditure.
- The removal of quotas may have some impact on the local agricultural sector (Text C) which could worsen the incidence of poverty (Text A, paragraph 6) and lead to over-reliance on other countries for food security since North Macedonia is already a net importer of food (Text C).
- As a member of the EU common market, North Macedonia will continue to have unrestricted access to imported capital goods, enhancing productivity and potential growth (Text A, paragraph 4).
- North Macedonia will have to adopt EU external tariffs which may negatively impact its trade position with non-members ( 3 neighbouring countries are not part of the common market - Text A, paragraph 1).
- The repatriation of foreign firms' profits (Text A, paragraph 3) may lead to a worsening of the balance of payments and a shortage of financial capital.
- There could be a loss of sovereignty as North Macedonia will need to give unrestricted access to EU firms which have already invested in essential services (Text A, paragraph 3)
- Compliance with EU standards for environmental protection could lead to less pollution and an improved quality of life (Text B, paragraph 3).
- Greater competition due to exposure to foreign firms may lead to innovation.

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

[Maximum number: 15]

Using real-world examples, discuss the advantages and disadvantages of a country being a member of a trading bloc.

Answers may include:
- Terminology: trading bloc.
- Explanation: of the impacts of a trading bloc on the economy in terms of employment, economic growth, economies of scale.
- Diagram: AD/AS or PPC diagram to illustrate growth. Trade diagram illustrating the removal of restrictions to trade.
- Synthesis (discuss): Advantages including 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, improved efficiency, lower prices. Disadvantages including impact on sovereignty, the effect on multilateral trade negotiations (such as those of the WTO), potential unemployment in less competitive member states.
- Example: real-world example of a country or countries that have become members of a trading bloc.
N.B. It should be noted that terminology, theory, diagrams and examples that have already been given in part (a), and then referred to in part (b), should be rewarded.

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

Assessment Criteria

Part (b) 15 marks

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 extract and data below and answer the questions that follow.
Tedious journey towards West African single currency

(1) The Economic Community of West African States (ECOWAS) has continued to push for a monetary union. Those involved in pursuing increased economic integration strongly believe that a common currency for the West African Monetary Zone (WAMZ) would increase trade in the region, increase competition (particularly in commodity markets) and stimulate economic growth.

(2) The proposed currency, the eco, will be initially introduced in the 14 member countries of WAMZ* which include The Gambia, Ghana and Nigeria.

(3) The proposal has been postponed four times, largely because of unequal progress among member countries in meeting the requirements to establish a monetary union by 2020.

(4) The main requirements for membership of the monetary union are:
- the budget deficit of each member country should not exceed 3 % of its gross domestic product (GDP)
- the average annual inflation of each country should be below 10 %
- each country must have enough foreign currency reserves to buy a minimum of three months' worth of imports
- the public debt to GDP ratio of each country should not be more than 70 %
- each country's exchange rate should be stable.

(5) Meeting the requirements for all countries by 2020 will be difficult, given that member countries have different economies with their own challenges. Nigeria is the only country which has met all requirements so far.

(6) For the monetary union to succeed there must be honesty among member countries. In addition, member countries would have to double their efforts in strengthening fiscal performance through improving tax revenue collection and reducing government expenditure on public services.

(7) Although a single currency in the region is likely to promote trade, it will mean that individual member countries will lose control over their own monetary policy, creating conflicts of interests. Research shows that the balance of trade of Nigeria, an oil exporter, tends to move in the opposite direction to its neighbours, who are largely importers of oil. Nigeria would push for higher interest rates in periods of high oil prices. That would be disastrous for other WAMZ economies which would be desperate for lower rates. and www.economist.com, 3 October 2014]
* WAMZ: Ghana, Nigeria, Sierra Leone, The Gambia, Guinea, Liberia, Benin, Togo, Cote d'Ivoire, Niger, Mauritania, Senegal, Burkina Faso, and Mali.

Figure 1-2015 projected economic data for selected members of WAMZ

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

All question bank results loaded

Covered syllabus points

4.4 Economic integration question 1

4.4 Economic integration question 2

4.4 Economic integration question 3