Stages of economic integration

There are several stages in the process of economic integration, from a very loose association of countries in a preferential trade area, to complete economic integration, where the economies of member countries are completely integrated.

 

A regional trading bloc is a group of countries within a geographical region that protect themselves from imports from non-members in other geographical regions, and who look to trade more with each other. Regional trading blocs increasingly shape the pattern of world trade – a phenomenon often referred to as regionalism.

Stages of integration

 

Preferential Trade Area

Preferential Trade Areas (PTAs) exist when countries within a geographical region agree to reduce or eliminate tariff barriers on selected goods imported from other members of the area. This is often the first small step towards the creation of a trading bloc. Agreements may be made between two countries (bi-lateral), or several countries (multi-lateral).

Free Trade Area

Free Trade Areas (FTAs) are created when two or more countries in a region agree to reduce or eliminate barriers to trade on all goods coming from other members. The North Atlantic Free Trade Agreement (NAFTA) is an example of such a free trade area, and includes the USA, Canada, and Mexico.

Customs Union

A customs union involves the removal of tariff barriers between members, plus the acceptance of a common (unified) external tariff against non-members. This means that members may negotiate as a single bloc with 3^rd parties, such as with other trading blocs, or with the WTO.

Common Market

A common market is the first significant step towards full economic integration, and occurs when member countries trade freely in all economic resources – not just tangible goods. This means that all barriers to trade in goods, services, capital, and labour are removed. In addition, as well as removing tariffs, non-tariff barriers are also reduced and eliminated. For a common market to be successful there must also be a significant level of harmonisation of micro-economic policies, and common rules regarding monopoly power and other anti-competitive practices. There may also be common policies affecting key industries, such as the Common Agricultural Policy (CAP) and Common Fisheries Policy (CFP) of the European Single Market (ESM).

Economic Union

Economic Union is a term applied to a trading bloc that has both a common market between members, and a common trade policy towards non-members, but where members are free to pursue independent macro-economic policies.

Macro-economic theory

Managing the economy introduces macro-economic concepts, models, and theories, and explains how macro-economic problems are analysed, and policies evaluated.

Macro-economics is traditionally broken down into macro-economic theory and macro-economic policy. Macro-economic theory involves the construction and use of models of the whole, ‘macro’, economy. Economists build such models so that they can explain the structure of an economy, and the role and significance of the parts that make up this structure.  Macro-economic models also help the economist understand how the separate components of the macro-economy are related.

 

Macro-economic models are also used to help economists and policy makers make predictions, or forecasts, about the economy, and about the effect of changes in one economic variable, such as exchange rates, on other variables, such as prices and output.

Unemployment

The full employment of labour has been a key economic objective ever since the mass unemployment experienced in the 1930s. When employment levels are less than their maximum possible an economy is experiencing unemployment. If labour is employed, but not effectively used, the situation is called underemployment.

The costs of unemployment

Opportunity cost.

Unemployment represents an opportunity cost because there is a loss of output that workers could have produced had they been employed.  The government is also forced to spend more on unemployment benefit. The money going on unemployment benefit could be spent on hospitals or schools.

Waste of resources.

Resources not employed are left idle, and this is a waste to an economy – education and training costs are wasted when individuals who have received these benefits do not work.

The Chancellor loses revenue.

The unemployed do not pay income tax, and pay less indirect tax as they spend less.

Erosion of human capital.

Many skills are acquired at work, and being unemployed means can mean fewer new skills are acquired, and existing skills are lost.

Lower incomes.

The unemployed have lower personal incomes and lower standards of living. In addition, the unemployed also suffer relatively poor physical and mental health.

Externalities.

There are further external costs associated with unemployment, such as increased crime, alcoholism and vandalism.

Hysterisis

When unemployment exists it can become embedded in the economy. For example, even those made temporarily unemployed, because, perhaps, their employer goes out of business, may find it difficult to get back into the labour market. The longer they remain unemployed, the harder it becomes to gain work. This may be because workers lose skills, or because they lose the habit of working.  Over time, some workers may become permanently excluded from employment and join the ranks of the long term unemployed (unemployed over 1 year) with little prospects of work.

Measuring unemployment

Measuring unemployment accurately is made difficult because of imperfect knowledge. Not all instances of unemployment are recorded, and records of unemployment may be inaccurate. Because the unemployed are eligible for benefits, some may claim benefit even when they work.  Conversely, many of the unemployed may not bother to inform the authorities, and therefore unemployment goes unrecorded.

Claimant count and ILO unemployment

The Claimant Count

The Claimant Count records those claiming unemployment benefit (Job Seekers Allowance, or JSA) and can prove they are actively looking for work. It excludes housewives and those on training schemes.

How useful is the Claimant Count?

The Claimant Count may not reflect the true level of unemployment in the UK economy, given that not all the unemployed will bother to claim, and some are deterred because they cannot prove they are looking for work. This is especially true of part-time employees who are much less likely to register as unemployed compared to full-time workers. While some individuals may fraudulently claim, it is generally recognised that the Claimant Count under-estimates actual unemployment levels.