Regional Economic Integration and the Impact of the Single European Market
Regional Economic Integration is an agreement between countries to reduce or remove trade barriers so that counties within the agreement will benefit by joining the integration. Without this Regional Economic Integration it was difficult for countries to trade because exporting goods from one country to another always had tariffs and nontariff barriers, making it harder for countries to ultimately benefit from trade between one another. This can be done by forming a Free Trade Area, Custom Union, Common Market, Economic Union, or Political union.
A Free Trade Area is where counties in the group try and remove ...view middle of the document...
A Political Union is where countries form one nation. They have one government and can trade freely between everyone in the union. All of these unions are fairly similar but all provide different cost and benefits of being members.
Static and Dynamic effects from the economic integration happen in the short run, medium run and long run, where static effects happen in the short and medium and dynamic effects happen in the long run. In the short run, removal of tariffs and non-tariffs happen or a trade effect occurs. This will lead to an increase in competition. In the medium run, competition occurs along with economies of scale and factory mobility. With competition monopolies can set the highest prices and perfect competitors have the lowest prices. Factor mobility comes to play in the medium run because capital and labor are free to move and is moved to where the return on the factor is higher. Finally, in the long run dynamic effect occurs with growth effects. If dynamic gains occur then growth increases along with a shift in the long run aggregated supply curve to the right. It will increase capital stock causing innovation which thereby creates new jobs, increase productivity, and migration. So in the long run, economic integration is extremely beneficial for a country.
Countries benefit from Regional Economic Integration and I would like to show you how by using an example of trade effects in a Free Trade Area. In the first diagram there is no economic integration occurring. Let S and D represent the countries supply and demand for good X with all goods imported by the country is dependent to a tariff. The non member countries have the lowest cost to produce at S (non-members). So if a tariff was present then the price of good X would be P (0) because it is the lowest cost to produce. X (0) to X (1) would then represent the amount imported of good X. The country’s government then would receive revenue from tariffs on all imports (Tariff Revenue or the shaded area). Thenext graph shows when a Free Trade Agreement between the countries is created.
The supply curve will become S (members) because the countries now can trade freely between each other without tariffs, Non-tariff barriers to trade, and quotas. The advantage then goes to the members because they are the high-cost producers and it gives them an advantage over low-cost non-member goods. Then the price will fall from P (0) to P (1) because no tariffs are between the two countries. Now consumers can buy more of good X at a lower cost or trade creation. This is shown by the blue and purple areas on the graph. A trade creation occurs when high cost domestic production is replaced by low cost imports from other members. Imports thereby increase from x (0) and x (1) to x (2) to x (3). The country will receive a loss tariff revenue or trade diversion, which is shown as the red on the diagram. A trade diversion occurs when low cost imports from non-members are...