Economic Integration & Terms of Trade.

1. Economic integration is trade unification between different nations or states by partial or full abolishment of custom tariffs on trades which take place within the borders of each state or nation. This is done to lower the prices for distributors and consumers and the goal is to increase trade. The main objective of economic integration is said to be an increase of welfare. The increase in trade between members of economic unions leads to the increase of the GDP of its members which, in turn, leads to better welfare – a goal of any state or nation around the world. Another objective of pursuing economic integration is for states to stay or become regionally and globally competitive.

The degree of economic integration can be categorised into six stages, namely:

i. Preferential trading area
ii. Free trade area
iii. Customs union
iv. Single market
v. Economic and monetary union
vi. Complete economic integration
These stages differ in the degree of unification of economic policies.
2. Definition and features of:

a) Free trade area – a designated group of countries that have agreed to eliminate tariffs, quotas and preferences on most (if not all) goods and services traded between them. It is the second stage of economic integration. Countries usually choose this type of economic integration if their economical structures are complementary. On the other hand, if their structures are competitive, countries are more likely to choose customs union.
b) Customs union – a type of trade bloc composed of a free trade area with a common external tariff. The participant countries set up a common external trade policy. In some case, they use different import quotas. Common competition policy is also helpful in avoiding competition deficiency. Countries usually establish a customs union in hopes of achieving economic efficiency and establishing closer political and cultural ties between the participant countries. Customs union is the third stage of economic...