TYPES OF ECONOMIC INTEGRATION

PROJECT ON
A STUDY ON TYPES OF ECONOMIC
INTEGRATION

SUBMITTED BY
ASHISH S. TIWARI
ROLL NO. A-90

M.COM PART I (SEMESTER - I)

2015-2016

UNDER THE GUIDANCE OF

PROF. DIPTI PAREKH

SUBMITTED TO
UNIVERSITY OF MUMBAI

NIRMALA MEMORIAL FOUNDATION COLLEGE OF

COMMERCE AND SCIENCE
90 FEET ROAD, ASHA NAGAR,
THAKUR COMPLEX,

TYPES OF ECONOMIC INTEGRATION

KANDIVALI (E), MUMBAI-400 101.

DECLARATION

I Mr.ASHISH S.TIWARI of M.COM Part 1 (Master of

Commerce Semester I) hereby declare that I have
completed the project on A STUDY ON TYPES OF
ECONOMIC

INTEGRATION

as

part

of

Internal

Examination in the Course of Advanced Cost Accounting

during the academic year 2015-2016.
The information submitted is true and original to best
of my knowledge. Wherever the matter is taken from any
published work, I have included that details in 'reference'.

TYPES OF ECONOMIC INTEGRATION

________________
Date of Submission.
(Ashish S.Tiwari)

________________
Signature of

CERTIFICATE

This is to certify that the project titled as A STUDY

TYPES OF ECONOMIC INTEGRATION

has

been

completed by Mr. ASHISH S.TIWARI of M.COM Part I

(Semester - I) as a part of internal examination during the
academic year 2015-2016.

Project Guide: -

_______________

Course Co-ordinator: -

_______________

External Examiner: -

_______________

Principal: -

_______________

TYPES OF ECONOMIC INTEGRATION

ACKNOWLEDGEMENT

I extend my gratitude to Prof. Dipti Parekh for

providing guidance and support during the course of
project. She has been a great help through the making of
the project. I thank Nirmala Memorial Foundation College
for giving me the opportunity to work on such a relevant
topic.
I also thank the Principal, faculty members and
librarian for their help and other who are indirectly
responsible for the completion of this project. In addition I
take this opportunity to thank our M.COM Coordinator Dr.
Alpa Upadhyay for being there with me always to guide
me and for extending her full support.

TYPES OF ECONOMIC INTEGRATION

DateMumbai
Signature of Student
(Ashish
S.Tiwari )

TYPES OF
ECONOMIC
INTEGRATION

TYPES OF ECONOMIC INTEGRATION

INDEX
SR.N
O

TOPIC

1.
2.

INTRODUCTION
OBJECTIVE & THEORY OF ECONOMIC
INTEGRATION

3.

TYPES OF ECONOMIC
INTEGRATION

4.

BENEFIT OF ECONOMIC INTEGRATION

5.

EFFECT OF ECONOMIC INTEGRATION

6.

CONCLUSION

7.

BIBLIOGARPHY

PG.N
O

TYPES OF ECONOMIC INTEGRATION

INTODUCTION OF ECONOMIC
INTEGRATION
Economic integration is the unification of economic policies between different
states through the partial or full abolition of tariff and non-tariff restrictions on
trade taking place among them prior to their integration. This is meant in turn
to lead to lower prices for distributors and consumers with the goal of
increasing the level of welfare, while leading to and increase of economic
productivity of the states.
The trade stimulation effects intended by means of economic integration are
part of the contemporary economic Theory of the Second Best: where, in
theory, the best option is free trade, with free competition and no trade
barriers whatsoever. Free trade is treated as an idealistic option, and although
realized within certain developed states, economic integration has been
thought of as the "second best" option for global trade where barriers to full
free trade exist.
Economic integration, process in which two or more states in a broadly
defined geographic area reduce a range of trade barriers to advance or
protect a set of economic goals
There are varying levels of economic integration, including preferential
trade agreements (PTA), free trade areas (FTA), customs unions, common
markets and economic and monetary unions. The more integrated
the economies become, the fewer trade barriers exist and the more
economic and political coordination there is between the member
countries.
By integrating the economies of more than one country, the short-term
benefits from the use of tariffs and other trade barriers is diminished. At the
same time, the more integrated the economies become, the less power the

TYPES OF ECONOMIC INTEGRATION

governments of the member nations have to make adjustments that would
benefit themselves. In periods of economic growth, being integrated can
lead to greater long-term economic benefits; however, in periods of poor
growth being integrated can actually make things worse.

CONCEPT OF ECONOMIC
INTEGRATION
Regional economic integration is a new and striking idea for the expansion of foreign trade among
developing countries. Regional economic integration implies the creation of the most desirable
structure of inter-regional economy through the formation of a customs union or of a free, trade
within the region and deliberately introducing all desirable elements of coordination and
unification.
Generally, such an economic integration would have to pass through three distinct but interdependent stages of cooperation, co-ordination and finally, of full integration. So, economic
integration may be identified as liberalization of trade as well as factor movements.
Complete economic integration involves a single economic market, a common
trade policy, a single currency, a common monetary policy (EMU) together
with a single fiscal policy, tax and benefit rates in short, complete
harmonisation of all policies, rates, and economic trade rules.

TYPES OF ECONOMIC INTEGRATION

OBJECTIVE OF ECONOMIC
INTEGRATION

There are economic as well as political reasons why nations pursue economic
integration. The economic rationale for the increase of trade between
member states of economic unions that it is meant to lead to
higher productivity. This is one of the reasons for the global scale
development of economic integration, a phenomenon now realized in
continental economic blocks such as ASEAN, NAFTA, SACN, the European
Union, and the Eurasian Economic Community; and proposed for
intercontinental economic blocks, such as the Comprehensive Economic
Partnership for East Asia and the Transatlantic Free Trade Area.
Comparative advantage refers to the ability of a person or a country to
produce a particular good or service at a lowermarginal and opportunity
cost over another. Comparative advantage was first described by David
Ricardo who explained it in his 1817 book On the Principles of Political
Economy and Taxation in an example involving England and Portugal.[3] In
Portugal it is possible to produce both wine and cloth with less labour than it

TYPES OF ECONOMIC INTEGRATION

would take to produce the same quantities in England. However the relative
costs of producing those two goods are different in the two countries. In
England it is very hard to produce wine, and only moderately difficult to
produce cloth. In Portugal both are easy to produce. Therefore while it is
cheaper to produce cloth in Portugal than England, it is cheaper still for
Portugal to produce excess wine, and trade that for English cloth. Conversely
England benefits from this trade because its cost for producing cloth has not
changed but it can now get wine at a lower price, closer to the cost of cloth.
The conclusion drawn is that each country can gain by specializing in the
good where it has comparative advantage, and trading that good for the
other.
Economies of scale refers to the cost advantages that an enterprise obtains
due to expansion. There are factors that cause a producers average cost per
unit to fall as the scale of output is increased. Economies of scale is a long run
concept and refers to reductions in unit cost as the size of a facility and the
usage levels of other inputs increase.[4] Economies of scale is also a
justification for economic integration, since some economies of scale may
require a larger market than is possible within a particular country for
example, it would not be efficient for Liechtenstein to have its own car maker,
if they would only sell to their local market. A lone car maker may be
profitable, however, if they export cars to global markets in addition to selling
to the local market.
Besides these economic reasons, the primary reasons why economic
integration has been pursued in practise are largely political. The Zollverein or
German Customs Union of 1867 paved the way for German (partial)
unification under Prussian leadership in 1871.

THEORY OF ECONOMIC
INTEGRATION
The framework of the theory of economic integration was laid out by Jacob
Viner (1950) who defined the trade creation and trade diversion effects, the
terms introduced for the change of interregional flow of goods caused by
changes in customs tariffs due to the creation of an economic union. He
considered trade flows between two states prior and after their unification,
and compared them with the rest of the world. His findings became and still
are the foundation of the theory of economic integration. The next attempts

TYPES OF ECONOMIC INTEGRATION

to enlarge the static analysis towards three states world (Lipsey, et al.) were
not as successful.
The basics of the theory were summarized by the Hungarian economist Bla
Balassa in the 1960s. As economic integration increases, the barriers of trade
between markets diminish. Balassa believed that supranational common
markets, with their free movement of economic factors across national
borders, naturally generate demand for further integration, not only
economically (via monetary unions) but also politicallyand, thus, that
economic communities naturally evolve into political unions over time.
The dynamic part of international economic integration theory, such as the
dynamics of trade creation and trade diversion effects , the Pareto
efficiency of factors (labor, capital) and value added, mathematically was
introduced by Ravshanbek Dalimov. This provided an interdisciplinary
approach to the previously static theory of international economic integration,
showing what effects take place due to economic integration, as well as
enabling the results of the non-linear sciences to be applied to the dynamics
of international economic integration.
were successfully applied towards:
1. the dynamics of GDP;
2. price-output dynamics and the dynamic matrix of the outputs of an
economy;
3. regional and inter-regional migration of labor income and value added,
and to trade creation and trade diversion effects (inter-regional output
flows).
The straightforward conclusion from the findings is that one may use the
accumulated knowledge of the exact and natural sciences (physics,
biodynamic, and chemical kinetics) and apply them towards the analysis and
forecasting of economic dynamics.
Dynamic analysis has started with a new definition of gross domestic
product (GDP), as a difference between aggregate revenues of sectors and
investment (a modification of the value added definition of the GDP).

SUCCESS FACTORS

TYPES OF ECONOMIC INTEGRATION

Among the requirements for successful development of economic integration

are "permanency" in its evolution (a gradual expansion and over time a higher
degree of economic/political unification); "a formula for sharing joint
revenues" (customs duties, licensing etc.) between member states (e.g., per
capita); "a process for adopting decisions" both economically and politically;
and "a will to make concessions" between developed and developing states of
the union.
A "coherence" policy is a must for the permanent development of economic
unions, being also a property of the economic integration process. Historically
the success of the European Coal and Steel Community opened a way for the
formation of the European Economic Community (EEC) which involved much
more than just the two sectors in the ECSC. So a coherence policy was
implemented to use a different speed of economic unification (coherence)
applied both to economic sectors and economic policies. Implementation of
the coherence principle in adjusting economic policies in the member states
of economic block causes economic integration effects.

GLOBAL ECONOMIC INTEGRATION

With economics crisis started in 2008 the global economy has started to realize quite a
few initiatives on regional level.It is unification between the EU and US, expansion of
Eurasian Economic Community (now Eurasia Economic Union) by Armenia and
Kirgyzstan. It is also the creation of BRICS with the bank of its members, and notably
high motivation of creating competitive economic structures within Shanghai
Organization, also creating the bank with many multi-currency instruments applied.
Engine for such fast and dramatic changes was insufficiency of global capital, while one
has to mention obvious large political discrepancies witnessed in 2014-2015. Global
economy has to overcome this by easing the moves of capital and labor, while this is
impossible unless the states will find common point of views in resolving cultural and
politic differences which pushed it so far as of now.
Globalization refers to the increasing global relationships of culture, people, and
economic activity.

TYPES OF ECONOMIC
INTEGRATION

TYPES OF ECONOMIC INTEGRATION

As you might expect, there are varying degrees or levels of economic

integration. Each type of integration represents a particular level of
economic integration. You can think of economic integration being on a
continuum in which no integration is at one end and complete economic
integration is at the other end.

Economic integration may take any one or a combination

of the following forms:

1.PREFERENTIAL TRADE AGREEMENT (PTA)

A preferential trade agreement is perhaps the weakest form of economic integration. In a PTA
countries would offer tariff reductions, though perhaps not eliminations, to a set of partner
countries in some product categories. Higher tariffs, perhaps non-discriminatory tariffs, would
remain in all remaining product categories.

2.FREE TRADE AREA (FTA)

A free trade area occurs when a group of countries agree to eliminate tariffs between themselves,
but maintain their own external tariff on imports from the rest of the world. The North American
Free Trade Area is an example of a FTA. When the NAFTA is fully implemented, tariffs of
automobile imports between the US and Mexico will be zero. However, Mexico may continue to
set a different tariff than the US on auto imports from non-NAFTA countries. Because of the
different external tariffs, FTAs generally develop elaborate "rules of origin". These rules are
designed to prevent goods from being imported into the FTA member country with the lowest
tariff and then transshipped to the country with higher tariffs. Of the thousands of pages of text
that made up the NAFTA, most of them described rules of origin.

3.CUSTOMS UNION
A customs union occurs when a group of countries agree to eliminate tariffs between themselves
and set a common external tariff on imports from the rest of the world. The European Union
represents such an arrangement. A customs union avoids the problem of developing complicated
rules of origin, but introduces the problem of policy coordination. With a customs union, all
member countries must be able to agree on tariff rates across many different import industries.

4.COMMON MARKET
A common market establishes free trade in goods and services, sets common external tariffs
among members and also allows for the free mobility of capital and labor across countries. The

TYPES OF ECONOMIC INTEGRATION

European Union was established as a common market by the Treaty of Rome in 1957, although it
took a long time for the transition to take place. Today, EU citizens have a common passport, can
work in any EU member country and can invest throughout the union without restriction.

5.ECONOMIC UNION
An economic union typically will maintain free trade in goods and services, set common external
tariffs among members, allow the free mobility of capital and labor, and will also relegate some
fiscal spending responsibilities to a supra-national agency. The European Union's Common
Agriculture Policy (CAP) is an example of a type of fiscal coordination indicative of an economic
union.

6.MONETARY UNION
Monetary union establishes a common currency among a group of countries. This involves the
formation of a central monetary authority which will determine monetary policy for the entire
group.
Perhaps the best example of an economic and monetary union is the United States. Each US state
has its own government which sets policies and laws for its own residents. However, each state
cedes control, to some extent, over foreign policy, agricultural policy, welfare policy, and
monetary policy to the federal government. Goods, services, labor and capital can all move freely,
without restrictions among the US states and the Nations sets a common external trade policy.

7.POLITICAL UNION
Represents the potentially most advanced form of integration with a common government
The level of Economic integration as opposed to its complexity is illustrated in the graph below:

TYPES OF ECONOMIC INTEGRATION

BENEFITS OF ECONOMIC INTEGRATION

1. PROGRESS

IN TRADE

TYPES OF ECONOMIC INTEGRATION

All countries that follow economic integration have extremely wide assortment of goods and
services from which they can choose. Introduction of economic integration helps in acquiring
goods and services at much low costs. This is because the removal of trade barriers reduces or
removes the tariffs entirely. Reduced duties and lowered prices save a lot of spare money with
countries which can be used for buying more products and services.
2. EASE

OF AGREEMENT.

When countries enter into regional integration, they easily get into agreements and stick to them
for long periods of time.
3. IMPROVED

POLITICAL COOPERATION.

Countries entering economic integration form groups and have greater political influence as
compared to influence created by a single nation. Integration is a vital strategy for addressing the
effects of political instability and human conflicts that might affect a region.
4. OPPORTUNITIES

FOR EMPLOYMENT.

The various options available in economic integration help to liberalize and encourage trade. This
results in market expansion due to which high amount of capital is invested in a countrys
economy. This creates higher opportunities for employment of people from all over the world.
They thus move from one country to another in search of jobs or for earning higher pay.
5. BENEFICIAL FOR

FINANCIAL MARKETS.

Economic integration is extremely beneficial for financial markets as it eases firm to borrow
finances at low rate if interest. This is because capital liquidity of larger capital market increases
and the resultant diversification effect reduces the risks associated with high investment.
6. INCREASE

IN FOREIGN DIRECT INVESTMENTS.

Economic integration helps to increase the amount of money in Foreign Direct Investment (FDI).
Once firms start FDI, through new operations or by merger, takeover, and acquisition, it becomes
an international enterprise.
Thus economic integration is a win-win situation for all the firms, people and the economies
involved in the process

CONTENTS
The European Union is not the only international
organisation immersed in a process of regional

TYPES OF ECONOMIC INTEGRATION

integration. In other parts of the world there are

similar processes. Here a few examples:
North American Free Trade Agreement (NAFTA):
Canada, Mexico and the USA.
Association of Southeast Asian
Nations (ASEAN): Brunei, Cambodia, Indonesia,
Laos, Malaysia, Myanmar, the Philippines, Singapore,
Thailand and Vietnam.
Southern Common Market (MERCOSUR):
Argentina, Brazil, Paraguay, Uruguay, Venezuela and
Bolivia.
Central American Common Market (CACM): Costa
Rica, El Salvador, Guatemala, Honduras and
Nicaragua.
Bolivarian Alliance for the Peoples of Our
America (ALBA TCP): Venezuela, Cuba, Bolivia,
Nicaragua, Dominica, Ecuador, San Vicente and the
Grenadines, and Antigua and Barbuda.

There are essentially two factors that define the economic

integration between states:
NEGATIVE INTEGRATION: this implies the
elimination of barriers that restrict the movement of
goods, services and factors of production.
POSITIVE INTEGRATION: this refers to the
creation of a common sovereignty through the
modification of existing institutions and the creation
of new ones.

TYPES OF ECONOMIC INTEGRATION