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Economic Integration · Paper 2 — Free Economics SL Practice Questions
1MasteryLAQRegional economic agreements (EU, NAFTA etc.)10 marksPaper 2~15 min
The United Kingdom completed its withdrawal from the European Union in 2021. Trade between the UK and EU is now governed by the Trade and Cooperation Agreement (TCA), a free trade agreement (FTA), rather than continued EU single market and customs union membership. UK exporters to the EU now face customs declarations, rules of origin checks, and regulatory barriers that did not exist before 2021. The UK Office for Budget Responsibility estimated that UK trade intensity (trade as a share of GDP) could be lower in the long run than if the UK had remained in the EU. Supporters of Brexit argue that the UK can now negotiate trade deals with faster-growing economies outside Europe.
(a)
Using a , explain how the introduction of non-tariff barriers (such as customs checks and regulatory divergence) between the UK and EU affects the price and quantity of a good that the UK imports from the EU. [4 marks]
(b)
Evaluate the likely welfare effects of the UK moving from deep integration (EU single market membership) to shallow integration (an FTA with the EU). In your answer, consider both static effects (trade creation and trade diversion) and dynamic effects (investment, innovation, and economies of scale). [6 marks]
Solutions
2MasteryLAQRegional economic agreements (EU, NAFTA etc.)10 marksPaper 2~15 min
The Pacific Alliance is a regional trade bloc formed in 2011 by Chile, Colombia, Mexico, and Peru. Member countries have eliminated tariffs on of traded goods and coordinate investment regulations. Since its formation, intra-bloc trade has grown by and foreign direct investment (FDI) inflows into member states have increased by . However, agricultural producers in Chile report that cheaper imports from Mexico have reduced their market share, while Mexican consumers have gained access to lower-priced Chilean wine.
(a)
Using a , explain how the removal of tariffs between two Pacific Alliance member countries can lead to trade creation and an increase in economic welfare. [4 marks]
(b)
Using evidence from the data, evaluate the extent to which the benefits of the Pacific Alliance are distributed unevenly among consumers, domestic producers, and multinational corporations (MNCs) within member countries. [6 marks]
Solutions
3ChallengeLAQRegional economic agreements (EU, NAFTA etc.)10 marksPaper 2~15 min
The European Union (EU) is a deep regional trading bloc with a single market, customs union, and common currency (the euro) used by 20 of its 27 member states.
The United Kingdom left the EU in 2020 (Brexit), ending its participation in the single market and customs union. Since Brexit, UK trade with the EU has faced new non-tariff barriers (customs checks, rules-of-origin requirements), and the British pound has depreciated against the euro by approximately .
Proponents of Brexit argued that leaving the EU would allow the UK to sign independent trade agreements (e.g., with Australia, New Zealand, and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership — CPTPP) and regain regulatory sovereignty.
A 2023 study by the UK Office for Budget Responsibility (OBR) estimated that Brexit has reduced UK long-run productivity by compared with remaining in the EU.
(a)
Using a fully labelled , explain the concepts of trade creation and trade diversion as they apply to a customs union. [4 marks]
(b)
Evaluate the view that the costs of leaving a deep regional economic agreement such as the EU necessarily outweigh the benefits for a member state. Refer to economic theory and evidence from the UK's experience of Brexit in your answer. [6 marks]
Solutions
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