Reference no: EM132346714

ECONOMICS

Section A

Answer this question.

1 Economic Integration

The world’s two best known trade groups are probably the European Union (EU) and the North American Free Trade Area (NAFTA).

In 2005, a study examined the likely impact of the proposed formation of a third major trade  group, JACIK. This would be an economic community comprising Japan, the Association of South East Asian Nations (ASEAN), China, India, and South Korea. ASEAN is a free trade area of ten countries including Indonesia, Malaysia and singapore.

Exporting is an important activity for all three trade groups as shown in Table 1.

Table 1: Exports by value and world share, 2003

	EU	NAFTA	JACIK countries
Exports (US$ billions)	3523	1486	1657
% of world total	46.5	19.6	21.9

The 2005 study produced models of three levels of economic integration and the welfare gains with each were estimated. The results are shown in Table 2.

Table 2: Estimated welfare gains from the formation of JACIK in US$ million

	Model 1: Free trade of goods and services	Model 2: Free trade of goods and services and free movement of capital	Model 3: Free trade of goods and services and free movement of both capital and skilled workers
Japan	107 626	111 807	150 695
ASEAN	13 451	13 553	19 405
China	6 327	7 100	16 328
India	6 971	7 379	9 937
South Korea	13 043	13 317	14 076
JACIK total	147 418	153 156	210441
Rest of World total	-27293	-45306	109 916
World total	120 125	107 850	320 357

(a) (i) Use Table 1 to compare the export performance of the three trade groups in 2003.

(ii) How might the differences you have identified be explained?

(b) (i) State three ways in which an economic union differs from a free trade area.

(ii) Explain two problems that might make economic integration difficult.

(c) Use Table 2 to show whether the free movement of capital or the free movement of skilled workers is estimated to be more beneficial for JACIK.

(d) Discuss how the rest of the world might view the formation of JACIK.

Section B

Answer one question.

2 (a) Explain whether the factors of production are always of equal economic importance within and between economies.

(b) Discuss whether planned economies should always be replaced by free market economies.

3 (a) Explain how income elasticity of demand and cross elasticity of demand can be used to classify different types of goods.

(b) Discuss the effectiveness of government use of maximum and minimum prices to help consumers and producers.

4 (a) How does aggregate demand and aggregate supply analysis explain the existence of inflation in the short run?

 (b) Discuss whether a period of inflation or a period of deflation is more economically desirable.