Regional Integration and FDI - 17.05.2018.pptx

Regional Integration and FDI - 17.05.2018.pptx - RMA 209...

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RMA 209 - International Economics Moses Mathu Thursday 17th May 2018
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Economic integration Global: trade liberalization by GATT or WTO. (across the world, requires countries to sign the agreements) Regional: preferential treatment of member countries in the group (Member countries within a particular region) Bilateral: preferential treatment between two countries
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Regional Integration RI is the process whereby countries in a geographic region cooperate to either reduce or eliminate barriers to the free flow of products, people, or capital.
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Theoretical motivations for RI 1. Allocation effects Removal of trade barriers increase efficiency in resource allocation. Scale effects - Creation of large markets – firms optimize on size -Economies of scale, -reduces average costs of production and lowering consumer prices Variety Effects – Variety of goods to choose from- increases welfare - competition lowers consumer price Wider array of production factors- firms use most appropriate inputs 2. Accumulation/ Growth effects - opportunities to specialize leads to: - low pdn costs -Greater returns to Factors of production -Technological spill-overs increases: -productivity and reduces production costs 3. Location effects – influences location decisions of foreign firms due to -increased market size -availability of raw materials
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Levels of Economic Integration From most Basic •Free trade area •Customs union •Common market •Economic union •Political union
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Levels of Economic Integration
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Free Trade Area Removes internal tariffs among members, but each country imposes its own external tariffs to the third country.(non members). NAFTA (North America Free Trade Agreement Customs Union Remove all barriers to trade among members, and set a common trade policy (external tarriffs) to nonmembers CARICOM (Caribbean Community and Common Market) Common Market Remove all barriers to trade, labor, and capital among members, and set a common trade policy against nonmembers EAC (East Africa community) Economic (monetary) Union Remove barriers to trade, labor, and capital, set a common trade policy against nonmembers, and coordinate monetary and fiscal policies Have common currency EU (European Union ) Political Union (political Federation) Coordinate aspects of members’ economic and political systems
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Benefits of RI Efficient allocation of resources; Increased trade between member countries and countries outside the region;
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