The European Union

A2 Economics Unit 4

Aims and Objectives

Aim: Understand the effects on trade of the EU. Objectives: Define the EU. Explain the structure of the EU. Analyse the effects of a single market. Evaluate the impact on trade of a single market.

What is the EU?

http://www.youtube.com/watch?v=RE6QgoykLZ U&feature=related 2 Trends An organisation of countries aimed at creating free trade and growth through economic and political stability. UK joined 1973 Did not adopt the Euro

The EU
27 countries Population of 500m Accounts for 30% of world GDP Largest exporter of goods/services GDP per capita is around 35% less than in USA and 15% less than Japan. Due to recent enlargement -Romania and Bulgaria

Structure of EU
Commission Parliament

Council of Ministers

EU

European Central Bank

European Central Bank

Issue bank notes

Oversee banking system

Price stability inflation close to 2%

Implement monetary policy in Eurozone

Support economic policies

Foreign exchange operations

Single Market
1992 removed barriers to trade and movement of labour. In groups decide on the benefits and drawbacks of a Single European Market (SEM).

Single Market
Economies of scale Increased dynamic efficiency Liberalisation of businesses Open access to markets Reduces immobility of labour Reduction in direct controls Increased competition may result in industry decline and structural unemployment. Immigration problems Transference of systemic problems euro crisis

Trade Creation
An increase in international trade that results from the reduction in tariff barriers. Country moves from buying goods from outside customs union, to becoming a member and buying from within union. Benefits from lower prices due to no tariffs. Still a common external tariff exists.

Trade Creation

Trade Creation
Before entry country imposed tariff of P+T Domestic demand is 0A, domestic supply 0B. Imports are BA. Removal of tariff reduces price to P. Domestic demand increases to 0C Domestic supply falls to OE. Imports rise to EC. EB+AC = trade creation Government loses import tariff revenue HFIJ

Trade Creation Speed Dating

Create the diagram on your white board, explain and rotate. Love is in the air.

Problems With Free Trade Areas

1960 UK member of EFTA allowed countries to negotiate tariffs with non members. Leads to trade deflection. Traders import goods to the member with the lowest tariff and then export them to other members.

Trade Diversion
As a result of joining a customs union, a country has to buy goods from a higher cost producer inside the union due to common external tariff. UK had zero tariffs on imported food and purchased from low cost nations like USA. After joining EU, it was cheaper due to CET for UK to purchase from less efficient producers such as France/Spain.

Trade Diversion

Trade Diversion
Before entry UK demanding OC at world prices UK farmers producing 0B Imports were BC Enters market price rises to EU level. Demand falls to 0A and domestic output rises to 0E. Imports are now EA Consumer welfare fallen Domestic farmers have gained HFKL revenue from tariff Net loss = triangles welfare has reduced overall!

Trade Creation + Diversion Speed Dating

Create the two diagrams on your white board and rotate. Love is in the air.