AVRUPA ENTEGRASYONU - Deneme Sınavı - 2

Preferential trade agreement, Free trade area, Customs union, Common market and EMU are the stages/types of economic integration.

Trade diversion occurs when traded commodity is shifted from the lowest cost
country that is out of the customs union (third country) to the relatively higher cost customs union member country.

Autarky is a closed economy condition. An economy that is closed and self-sufficient is at the autarky condition.

Dynamic Effects of Customs Union: Dynamic effects are long run effects of customs union. They arise due to increased competition within the customs union, higher level of technology, economies of scale, induce to foreign direct investments and better allocation of economic resources.

Factor-Price Equalization Theorem: It is one of the sub-theorems of the Heckscher-Ohlin Theory. Given a number of assumptions of the Heckscher-Ohlin Theory, namely perfect competition in both the commodity and factor market, no transportation costs between the trading countries, identical demand preferences of the trading countries and constant returns to scale in production in both of the trading countries, the Factor Price Equalization Theorem postulates that international trade equalizes the factor prices along with the commodity prices. In other words, international trade provides one-to one correspondence between commodity prices and factor prices.

Capital-abundant country means that the ratio of the total amount of capital to the total amount of labor available in the country is greater than the other country

Single European Act was the first significant amendment of the Treaty of Rome. It was signed in February 1986 and entered into force in July 1987. Its main aim was to set a deadline for the establishment of European Single Market by 1992. It also paved the way for deeper integration by making it easier to decide on EU legislation, strengthening the EU Parliament and laying down the foundations of the EU foreign policy.

Convertibility is usually used nominate currency convertibility. In this
respect, currency convertibility refers to a currency that can be purchased or sold without any government restriction or regulation.

Optimum currency area is a currency area in which costs and benefits of sharing a single currency is balanced.

The last stage/type of the economic integration process is the economic and monetary union. Economic and monetary union takes part at the top of the pyramid. Certainly, it is the most comprehensive type of economic integration. Economic and monetary union encompasses all the features of the common market and goes further to unify all the economic institutions.

Free trade area is the next stage within the economic integration. The member countries are entitled to abolish all trade restrictions among themselves but continue to implement their own trade policies toward the countries that are out of the free trade area. In other words, member countries of a free trade area are free to implement their national external trade policy to the third countries.

The third stage/type of economic integration is customs union. Member countries of a customs union abolish all the trade restrictions among themselves and implement a common external trade policy in the third countries. Moreover, the customs union member countries act together as a single entity at the negotiation and conclude the trade agreements with the other countries (third countries). The implementation of the common external tariff avoids the possibility of trade deflection or transshipment. Certainly, it is one step further through a deeper integration. Member countries leave their independence in deciding and implementing their own tariff rates.

Theory of customs union analyzes the welfare effects of customs union. The welfare effects of customs union are introduced by Jacob Viner in 1950. Viner in his book, titled The Customs Union Issue, examines the static effects of customs union.

"Comparative advantage" term depends on the law of comparative advantage that is presented by David Ricardo in his famous book, titled Principles of Political Economy and Taxation, published in 1817. According to the law of comparative advantage, the country has to be specialized in the commodity in which its absolute disadvantage is smaller.

Increased competition will lead to some search of higher level of technology. Since producers would like to rise efficiency in order to meet the increased competition, they would demand higher level of technology within their production. So, (I) is not ture.

Common Market of the EU as lately referred to EU Internal Market was established in 1993. It had been a major aim of the EU since the signing of the Treaty of Rome. It is well known that, establishment of a common market within the EU was the main aim of the Treaty of Rome.

The European Commission identified twelve levers to ensure the common goal of highly competitive social market economy. These levers were;

• access to finance for small and medium sized enterprises,

• mobility for citizens,

• intellectual property rights,

• consumer empowerment,

• services,

• networks,

• the digital single market,

• social entrepreneurship,

• taxation,

• social cohesion,

• business environment,

• public procurement.

The Maastricht Convergence Criteria in detail:

Inflation: To be eligible for the membership of the monetary union of the EU, a country’s inflation rate should not exceed the average of the three lowest inflation rates achieved by the EU member countries by more than 1.5 percentage points.

Long-term nominal interest rate: It should not exceed the average long-term nominal interest rates observed in the three lowest inflation rate countries by more than 2 percentage points.

Budget deficit: It should not exceed 3 percent of GDP.

Public debt: It should not exceed 60 percent of GDP.

EMS membership: Every member country is supposed to take part in the ERM for at least two years without any devaluation.

Based on the requirements of the Maastricht Treaty, the Euro was launched on 1 January 1999. On the same date, the Eurozone established the implementation of monetary policy transferred from member states to the European Central Bank which was founded in Frankfurt in 1998.

The probable reasons of the failures of the economic integration initiatives might be as follows:

1. High-dependence on trade with the countries that are outside the economic integration,

2. A small domestic market that is far from supporting a higher degree of industrialization and economies of scale,

3. High transportation costs and weak international relations.