Notesale: Turn your study into money

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Economic Integration

Agreements made to reduce or eliminate all trade tariff and non-tariff barriers
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Preferential Trade Agreements PTA
 Offer tariff reductions, not necessarily eliminations
 In some product categories and not others
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Free Trade Area
 Agree to eliminate tariffs between themselves
 Maintain their own (Own meaning each individual country) external tariff for the rest of the
world
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Customs Union
 A group of countries agree to eliminate tariffs between themselves
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Deep Integration
Deeper Integration tends to replace political institutions with macro regional institutions in different
areas
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 It impacts on laws and institutions, some of these laws could have been kept as domestic
prerogatives even at high levels of integration
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European Economic Community (EEC) is an example of this but abolished in 2009 and succeeded by
the Lisbon Treaty
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 Commonly referred to as a single market

Monetary Union
A high level of integration that removes domestic monetary policy to be determined by a new
regional central bank
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Maastricht treaty, where the European Central Bank (ECB) was creates issuing euros and notes and
conducting monetary policy for the bloc
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 Trade Diversion
o Diverts trade away from a more efficient supplier outside the CU to a less efficient
supplier within the CU

Assumptions of Model
Three countries A B C, A is a small country therefore they have no effect on price, B and C large
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Simply means both
get the same tariff
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Recap

This is just a recap of Consumer and Producer Surplus, which will be used to evaluate Welfare
Effects
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This is
below the current equilibrium price but above the supply curve
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This
is above the price but below the demand curve
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 Firstly, C is a more
efficient importer than
B, shown by Pb being
higher than Pc
 A Tariff is imposed on
both countries
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 Equilibrium price is
lower than the import
price with tariffs of Pb
+t and Pc + t
 Country A is selfsufficient therefore
does not import
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After creating the Customs Union

The equilibrium after Country A forms a Customs union with country B
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 Country C still has
tariffs therefore they
do not import as they
are too expensive
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Outcomes
 Consumer surplus
increases a + b + c
 Producer surplus
decreases - a
 Net welfare:
a+b+c–a=b+c

Trade Creating customs
union increases welfare

Trade Diverting Customs Union
Autarky

This is the equilibrium before the customs union
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 Country A imports red
line from country C (D1
- S1
 Country A does not
import from country B
 Tariff Revenue = C + E

After creating a Customs Union

Country A forms a Customs Union with Country B
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Indicated by the
yellow line
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 Trade is therefore
diverted from country
C to the less efficient
Country B


Outcomes

 Consumer surplus
increases a + b + c + d
 Producer surplus
decreases by -a
 Tariff revenue lost - (c +
e)
 Net welfare:
= b + d -e

If E is greater than B and
D then welfare effect will
be negative and vice
versa
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(Limitation
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Dont consider dynamic changes of welfare

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