Trading blocs and Economic Integration

A trading bloc: a group of countries that join together in some form of agreement in order to increase trade between themselves and/or to gain economic benefits from cooperation on some level. Below is a list of some of several regional trading blocs.

East African Community (EAC)

1. The nations involved in the trading bloc 
• Republic of Kenya
• Republic of Rwanda
• Republic of Tanzania
• Republic of Burundi
• Uganda of Uganda
  
2. Identify the kind of trading bloc (customs union, free trade area, common market, monetary union)
• EAC is a customs union- a type of trade bloc which is composed of a free trade area between the member countries, that have agreed to a common external tariff with respect to imports from the rest of the world.
  
3. The impact that membership in the trading bloc has had on the economy of one member nation.
• Rwanda’s Minister for East African Affairs, Amb. Valentine Rugwabiza, has said the country is already reaping benefits of being part of the East African Community, seven years since becoming a member. During the past few years since Rwanda joined the EAC, the investments coming from the region have consistently increased. Businesses from Kenya have invested in Rwanda more than US$450 million which has contributed to the creation of thousands of jobs. Yet they have not made such impressive progress regarding trading across borders, and this doesn't depend solely on them; it has to do with how long it takes to cross those borders, cost of transport and of course non tariff barriers. Even though tariffs between the countries have been removed as they are in a customs union, different non-tariff restrictions keep popping up.
  
4. An example of trade creation and trade diversion (appropriate charts)
   
   
   Kenya exports approximately three-fifths of its goods to Uganda and Tanzania, but had been facing tariffs of between 10 and 20 per cent before the establishment of the East African Community. In September 2014 Tanzania became the largest export destination of Kenyan goods within East Africa. The long-held perception by Uganda and Tanzania that Kenya's economy - mainly the manufacturing sector - was more competitive than theirs - causing production to go from higher to lower cost - more efficient. GRAPH COMING AND DIVERSION EXAMPLE TOO

Foreign Exchange Market and Exchange Rate Determination

1. Exchange rates are like prices, in that they are determined by supply and demand. But not all exchange rates are allowed to float freely, since the governments or central banks of some countries actively intervene in the market for their currency to manipulate its value. Identify one policy a government or central bank could use to strengthen the value of its currency and one policy that could weaken the value of a currency.

• Governments could use fiscal policy to lower the taxes in a country, leaving people with more money in their pockets to spend. Therefore spending on imports would rise as well, causing an increase in supply- leading to a decrease in the value of the currency

• To strengthen the value of a currency, governments could use monetary policy in order to increase interest rates. This increases foreign investors wanting to invest into your country, leading to more demand- which leads to strengthening of the currency.

2. What are the benefits of having a stronger currency?

Having a currency that has a higher value than another currency means you can buy they currency cheaper. Therefore also meaning that the other country's export goods are cheaper for you to buy.


3. What are the benefits of having a weaker currency?
When having a weaker currency in comparison to a stronger one, the people in the country with the stronger currency will will want to buy more of your exports as they would be cheaper for them to buy.

4. Which determinant of exchange rates presented in the video do you think are most attributable to the fluctuating values of currencies on foreign exchange markets, and why? Relative incomes, relative interest rates, relative inflation rates, speculation or simply the tastes and preferences of global consumers?

I think the determinant of exchange rates most attributable to the fluctuating values of currencies on foreign exchange markets is relative interest rates. As a country's interest rates rise, more people/companies from foreign countries will want to invest into your country- in order to earn more money back. And as interest rates are constantly managed, and in today's internet based world, investments are quick to make causing constant differences in the flow of money from one countries to other. As well as these investment amount are often very big and therefore affecting the exchange rate greatly.

EURO (€) VS. NORWEGIAN KRONER (NOK) 

List and explain the factors that might lead to a fall in the supply of the selected currency in relation to the Euro market.

Norway might be experiencing high rates of inflation, therefore their products would seem more expensive for European countries resulting in less demand for Norwegian products leading to a decrease in the supply of euros in Norway,

Norway might have lowered their interest rates, therefore foreign European countries will lack an interest to invest in Norway, leading to a decrease in supply of euros. 

Another explanation could be a decrease in income for some European countries, therefore decreasing demand for foreign goods such as goods from Norway.

Or maybe European consumers have just changed their tastes and preferences away from Norwegian goods.

Worksheet 23.1- Exchange Rates

Exchange rates, currency manipulations and the balance of trade

1. How does China continuing to undervalue its currency threaten the industrial economies of its largest trading partners? 
• As china is artificially keeping i's currency at a low level compared to the dollar of United States, one of its largest trading partner. It is making sure US companies rather want to  have their goods manufactured in china as the labour there is cheaper due to the low value of China's currency. Yet US's large companies don't develop factories in the US itself, the problem of high unemployment might suffer even more. Less manufacture and high unemployment will eventually lead to a decrease in market size and economic development.
  
  
2. What is China’s purpose for maintaining the low value of the RMB relative to the currencies of other nations? 
• As china has a large population it also has a large quantity of labour, a lot of it unskilled labour. Therefore they have a lot of people to work to produce manufactured goods for a low wage. As China maintains it's currency at a low value, it will be cheaper for foreign countries to buy China's exports making them more appealing. Through selling more of their goods, China experiences economic growth in relation to the market size and money in the circulation.
  
  
3. What would be a unilateral protectionist measure the US government may advocate if the WTO refuses to take action against China’s currency manipulations? How would you advise president Obama on the issue of whether to take protectionist action against China in the context of the current economic crisis in America?
   
• A unilateral protectionist measure the US government could take against China, would be to impose a quota or a tariff on the imports from China. This could cause an aggression in the population of United States as many of their goods would suddenly become more expensive, yet the build-up of domestic factories providing available vacancies would take a bit of time. Yet eventually this wood lead US out of the economic crisis and maybe even move to growth.
  Placing quotas on foreign goods has helped US before, like when they places quotas on... steel. With the quotas in place they could develop their domestic manufacture of steel, which eventually lead to US steel productions   being one of the cheapest and most efficient in the world. I'd advise for US to set quotas on certain goods, yet only when being sure there would be someone ready to develop domestic production of the exact same or supplementary good.

Non-price Determinants-Supply & Demand

The non-price determinants of supply include:

1. Changes in costs of factors of production (land, labour, capital, entrepreneurship). As there is an increase in costs of production → the supply shifts to the left, meaning there would be less supply, or in other words you would have to pay more for the same quantity.
   
2. State of technology, as technology Improves- supply shifts to the right (meaning more supply for cheaper prices)
   
3. Price of related goods: An increase in the price of a related good can influence the supply of the original good. Consider the tradeoff in the production of corn and wheat. If the price of corn rises relative to the price of wheat, it would probably be profitable to move resources from wheat production to corn production. This will cause the supply curve of corn to shift to the right and the supply curve of wheat to shift to the left.
   
4. Future expectations: if demand for the product is likely to rise, companies increase their supply (in order to be ready to supply more in the future and gain higher profit for example prior Christmas there would be an increased production of decorations.)
   
5. Government intervention: 
• Indirect taxes → increase costs → supply shifts left (less supply, increase in price)
• Subsidies → reduce costs → supply shifts right (more supply, cheaper price)
•  other ways to intervene -exchange and interest rates.
  
6. Size of the market: more firms producing the same or a very similar good means more supply overall, therefore supply of the market shifts to the right as more are being supplied at each price level.
   
7. Weather/seasonality: Affecting mostly agriculture, long periods of rain or drought can influence the quantities of crop received at the end. As well as during winter seasons many countries aren't able to grow their own crops/vegetables-decreasing supply.
   
8. Supply Shock: An unexpected event(political or environmental) that changes the supply of a product or commodity, resulting in a sudden change in its price and it's effect is almost always negative 

A shift in supply could be caused by:

supply shock:A sudden political or environmental situation may change the supply of currency.
government intervention: in different situations governments could impose a different exchange rate causing a shift in the market of a currency.

future expectation: if there's a serious depreciation expected in a currency in relation to another, the country/government might take measures to prevent that from happening.

The non-price determinants of demand include:

1. Income: As income rises, demand for normal goods rises causing the demand curve to shift to the right. Yet the demand for inferior goods usually falls, demand curve shifts to the left.
   
2. Consumer expectations of future: When consumers expect the prices of a certain good to drop in the future, the demand at the moment will fall and rise when the prices drop, and vice versa.
   
3. Consumer Tastes & Preferences: If consumer change their tastes in favor (for example an advertising campaign) then demand curve shifts to the right.
   
4. Price of related goods (substitutes and complements): 
• As price of substitutes increases (movement along the curve) the demand shifts to the right. 
• As price of complements increases (movement along the curve) the demand shifts to the left.
5. Demographic changes: if population grows, the demand for most products will increase, thus the demand curves shift to the right as more will be demanded at each price level.
   
6. Weather/seasons: as a country is entering a rainy season, the demand for umbrellas would increase greatly. 

A shift in demand could be caused by:

weather/seasonality: many countries which depend largely on tourism see great demand in their currency over the seasons.

 
price of related goods(other currencies): If certain countries are for example experiencing high inflation then their currency would appreciate and there would be less demand for it as it would become more expensive to obtain (as well as their exports) 

consumer expectations for the future: If consumers expect the value of a certain currency to depreciate, then the demand for it at the moment might drop as consumers would be waiting for the depreciation before exchanging their money.