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Economic Integration

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Introduction

Economic Integration 1. Economic integration refers to the merging of national economies and the blurring of the boundaries that separate economic activity in one nation state from another. In addition, the use of boundaries by a nation state will reduce economic efficiency. Examples of boundaries include * The use of tariffs, which will lead to an increase in the price of imports. The increase in prices will decrease consumer demand and will stimulate domestic supply. * Quotas have the same affect as tariffs, where it will limit imports and hence raise the price level. * Government subsidies will lead to a domestic price decrease. The use of the subsidy will lower domestic prices from Pe to P1. Therefore, with domestic prices it will encourage domestic consumers to purchase their goods and services domestically and not on the European Market. There are also five levels of economic integration; firstly, there is a Free Trade Area, this is the weakest form of economic integration and involves the removal of tariffs and quotas on trade between member states. ...read more.

Middle

The final stage of economic integration is a Monetary Union, where this is the strongest form of integration, where monetary policies are centralised. There is extended macroeconomic policy coordination to the monetary field, and the degree of monetary union can differ from a system of semi fixed exchange rates to the adoption of a single currency (The Euro). 2. The effects of economic integration upon the economies of Europe may be analysed in two ways, through the static gains and the dynamic gains. The static gains of economic integration are mainly through trade creation and trade diversion. Before there is trade creation, the import price, which had to be paid by French firms before the formation of the Franco-German group, was 0P Pre. This price has an import duty on it. French domestic supply is 0Qs1 and domestic demand is oQd1. French imports are therefore equal to 0Qd1- 0Qs1. With economic integration, trade barriers are removed, and hence the import duty is removed from the French import price. The fall in price from 0P Pre to 0P Post, shows that there will be an increase in French consumption to 0Qd2, and the domestic supply production falls to oQs2. ...read more.

Conclusion

There is a customs union between France and Germany, and the effect of tariff removal on German sausages is to increase the relative price on Swiss sausages Before the customs union P pre is the cheapest import price available. French consumption is equal to 0Qd1, and domestic French production is 0Qs1 and imports (from switzerland) are given by oQd1 minus 0Qs1. Once the trade relationship is established with Germany, the tariff on German sausages is removed and the import price falls to Ppost. This therefore leads to an increase is consumer surplus, through access to cheaper imports. Consumer surplus is equal to area= a+b+c+d. The dynamic gains to economic integration are there is going to be increased specialisation, as countries will use comparative advantage to gain the maximum advantage through trade with another country. There will also be economies of scale, where firms' costs will decrease in the LR. However, the costs of integration will be increases in world prices, and reductions in competitiveness. Therefore, there is going to be increased in the number of industries who are oligopolies and monopolies. Therefore, goods could reduce in quality, as there are no other substitutes and consumer will have to pay high prices for low quality goods. By Shan Visram Europe Module ...read more.

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