4.4 Economic integration questions for IB Economics

Explain how international trade may allow firms to benefit from economies of scale and to produce more efficiently.

Using real-world examples, evaluate the view that membership of a trading bloc is the best way for a small economy to gain access to larger markets.

Define the term free trade area indicated in bold in the text (Text A, paragraph 1).

Using Table 1, calculate the percentage of Calvesh's total exports that went to CEC members in 2025.

Using Table 1, calculate the percentage increase in Calvesh's exports to CEC members between 2023 and 2025.

Using an international trade diagram, explain the likely effect on Calvesh's dairy farmers of removing the tariff on dairy imports from CEC members (Text A, paragraph 4).

Using information from the text/data and your knowledge of economics, evaluate the likely effects of membership of the CEC on firms and consumers in Calvesh.

Using Table 1, calculate the percentage of Trevania's total exports of goods that went to RHCU members in 2025.

Using Table 1, calculate Trevania's balance of trade in goods in 2025.

The sugar market

Trevania imports refined sugar. The lowest-cost producer, a country outside the RHCU, sells sugar at a world price of US$400 per tonne. Kambala, an RHCU member, sells sugar at US$460 per tonne. Trevania currently applies a tariff of 25 % on all imported sugar, so it buys all its imported sugar from the lowest-cost producer.

Table 2: Trevania's market for sugar

Assume that the demand and domestic supply curves are straight lines.

Using Table 2, calculate the tariff revenue Trevania currently collects on imported sugar.

Using Table 2, calculate the change in consumer surplus in Trevania's sugar market if Trevania joins the RHCU.

If Trevania joins the RHCU, producer surplus of its sugar producers would fall by US$2.88 million. Using your answers to (a)(iii) and (a)(iv), calculate the net change in Trevania's economic welfare in the sugar market if it joins the RHCU.

Distinguish between trade creation and trade diversion.

The cement market

Trevania's two cement producers are protected by a 40 % tariff and have high costs. Cement from Lomwe, an RHCU member, would cost Trevanian buyers 30 % less than domestic cement if it entered tariff-free. Producers outside the RHCU would still face the 25 % CET and would be more expensive than Lomwe.

Using a tariff diagram and the information provided, explain how joining the RHCU would lead to trade creation in Trevania's cement market.

Further information

• If Trevania joins the RHCU, its tariff on imported tractors and irrigation equipment, almost all of which come from outside the RHCU, would rise from 5 % to the CET of 25 %.

• Trevania is negotiating a bilateral trade agreement with a large Asian economy that buys 30 % of its tea. As an RHCU member it could not sign this agreement on its own.

• Kambala produces 55 % of the RHCU's manufactured goods, and other members complain that new factories tend to locate there.

Using the information provided, explain two possible disadvantages, other than trade diversion, for Trevania of joining the RHCU.

Policy options under consideration in Trevania

• Join the RHCU as a full member. Exporters would gain tariff-free access to members, which buy 20 % of Trevania's exports, and FDI from firms serving the whole RHCU market is expected to rise. Tariff revenue (14 % of government revenue) would fall, and the government would lose control of its trade policy.

• Negotiate a free trade agreement with the RHCU instead of joining the customs union. Trevania would keep its own external tariffs and could sign the Asian agreement. Exporters would have to prove the origin of their goods; this paperwork is estimated to add 8 % to the cost of goods traded with the RHCU.

• Complete the bilateral agreement with the large Asian economy. It would remove the 15 % tariff on Trevania's tea and cut flowers, but Trevania would have to remove tariffs on most manufactured goods from that economy over ten years.

• Cut tariffs on imported capital goods to zero for all countries. This would lower costs for farmers and manufacturers but reduce tariff revenue by about 3 % of total government revenue.

• Invest in cross-border roads and one-stop border posts with RHCU neighbours. Delays at borders currently add about 20 % to the cost of moving goods to neighbouring capitals. The cost would be US$450 million over five years.

Using the information provided and your knowledge of economics, recommend a policy the government of Trevania could introduce to increase the gains it receives from international trade.

Using a diagram, explain the effects of a production subsidy on the revenue of domestic producers and the revenue of foreign producers.

Using real-world examples, discuss the effects of government subsidies to domestic firms on international trade relations.

Using Table 1, calculate Lindora's rate of economic growth in 2025. Give your answer to two decimal places.

Using Table 1, calculate Lindora's unemployment rate in 2025.

Inflation in Norveth, another NSMU member, was 6.1 % in 2025. Using Table 1 and the information provided, calculate the real interest rate in Lindora and in Norveth in 2025.

Lindora cannot devalue its currency or lower its own interest rate. Some economists argue that Lindora's recession will end only when its wages and prices fall relative to those of other NSMU members.

Using an AD/AS diagram, explain how a fall in Lindora's wages and prices relative to other NSMU members could raise its real GDP.

Government finances

NSMU rules require members to keep government debt below 60 % of GDP and budget deficits below 3 % of GDP.

Table 2: Lindora's government finances, 2025 (NRD billion)

Using Table 2, calculate Lindora's government debt as a percentage of GDP in 2025.

Using Table 2, calculate Lindora's budget deficit as a percentage of GDP in 2025.

Using the information provided, explain two disadvantages for Lindora of being a member of the NSMU during its recession.

Outline one advantage for Lindora's tourism industry of using the same currency as the countries from which most of its visitors come.

Policy options under consideration in Lindora

• Raising public investment in infrastructure and renewable energy by NRD 8 billion a year would raise AD, but would push the budget deficit further above the NSMU limit of 3 % of GDP. The NSMU has an investment fund that can pay up to half of the cost of approved projects.

• Cutting employers' social insurance contributions by 2 percentage points for two years would lower the cost of hiring workers, at a cost of NRD 5 billion a year in lost revenue.

• Reforming labour laws to make it easier for firms to hire workers on flexible contracts could encourage hiring, but trade unions have threatened national strikes.

• Retraining programmes for 60 000 unemployed construction workers in skills needed in the growing health care and renewable energy sectors would cost NRD 1.2 billion over three years.

• Some politicians have proposed leaving the NSMU and reintroducing a national currency. Economists estimate that this would cause a large fall in confidence and a sharp rise in interest rates on government debt.

Using the information provided and your knowledge of economics, recommend a policy the government of Lindora could introduce to reduce unemployment, without changing its membership of the NSMU.