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European Union
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2
Introduction to Economic
Integration
Forms of integration
Gains from integration
EU structures
- Institutions
- Decision making
3
Forms of Economic Cooperation
between Nations
4
Forms of Economic Association
5
Gains from Integration
Assumption: more
trade is good
More trade see International
Economics for
Stop wars! trade theories
6
Lets consider the effects of economic
integration
Trade effect
- trade creation and trade diversion
Pro-competitive effects
Economies of scale effects
Growth effects
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Trade Effects of a Customs Union
between Two Countries
a) Country A Two small price-taking
SA countries, A and B, facing
DA increasing production costs
b) Country B
pt SB
wt
pu a b c
g
pw d pB w
DB
Q1 Q2 Q3 Q4 Q5 Q6 Q7
Trade creation a + c
Trade diversion d Trade creation g
One homogeneous product, no close substitutes. 8
Pro-Competitive Effects of a CU
If the size of a countrys market is limited
and competition imperfect, participation in a
CU will increase competition welfare
benefits
An Example:
Lets assume a monopoly market in country A, with demand
curve DA and supply SA. Then DA= AR and SA= MC
profit maximizing quantity = QA and price = pA, which is
much higher than pU.
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Pro-Competitive Effects of a CU
Production Welfare changes
Producers Consumers
Monopoly - (c + d)
Perfect competition - (c + d) c+d+g+z
Pro-competition effects g+z
pA
SA = MC
c d g
pU z
SU
h
MR
DA= AR
QA QU
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Economies of Scale Effects in a CU
So far we have assumed increasing production
costs in the countries forming the CU and constant
production costs in the world market
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An Example
Assume existence of economies of scale in
production of a commodity x produced in Country A
The domestic demand is too small to allow the
producer to reach an efficient scale
Assume that due to restrictions in trade, exports
would not be large enough either
When Country A joins a CU, restrictions are lifted
and now there is enough demand
- For sake of convenience we assume that the CU
market allows volume of production that exactly
matches As minimum average cost
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Economies of Scale Effects continued
Before customs union,
A protects domestic
production by a tariff.
pA
SA= AC
pU
DA
DA+U
Q3 Q4 Q5
Country A
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Factor Mobility in Common Markets
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Effects of Factor Mobility in CM
continued
The advance of integration from CU to CM
intensifies the tendency towards a single price
for each commodity (service) and a single price
for each factor of production
Common markets improve the allocation of
factors across country boundaries as well as
efficiency and welfare
- The other effects mentioned before assume
that factors of production are immobile.
However, if they can move accross borders,
economic growth increases
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Institutions of EU
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Democracy in EU: Council of the EU
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Democracy in EU: The Commission
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Democracy in EU: Council voting rules
New voting rules in 2014: In order for a proposal to be
passed
- Majority of countries: 55% if acting on a proposal from the
Commission or else 72%, and
- Majority of population: 65%.
- Also, there have to be at least 4 countries voting against the
proposal (and therefore the 3 biggest countries do not have an
automatic veto right)
- Exception: sensitive topics like foreign policy and taxation
require a unanimous vote (all countries in favour).
The old Council voting rules (can be used until 2017): In
order for a proposal to be passed
- 50% (if proposal was made by the Commission) or 67% (all
other cases) of the members states,
- 74% of the voting weights, which are based on the countrys
size (Germany and France have 29, Finland only 7), and
- 62% of the EU population
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EU Policies and Legislation
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EU Policies
Social policy
Regional policy
Agricultural policy
Environmental policy
Competition policy
Industrial policy
Transportation policy
Trade policy (vis vis rest of the world)
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