4. Economic 4. Economic Integration Integration Theory and Theory and PracticePracticeDefinition of economic integrationDefinition of economic integration? The combination of several national economies into a larger territorial unit. ? It implies the elimination of economic boarders between countries. ? Economic borders: any obstacle which limits the mobility of goods services and factors of production between countries. Definition of economic integrationDefinition of economic integration Jan Tinbergen: all processes of economic integration include two aspects: Negative integration: the elimination of obstacles. Positive integration: harmonization, coordination of existing instruments. Number of regional trade agreements, 1948-2002Source: WTO (2003)Levels of economic integrationLevels of economic integration There are several levels of economic integration: A. Free trade area B. Customs union C. Common or single market D. Economic and monetary unionTypes of Regional Trade AgreementsTypes of Regional Trade AgreementsThe EUFECHAPAISFECHAAMPLIACIONESFECHA AMPLIACIONESAlemaniaDinamarca2004HungraFranciaIrlanda2004PoloniaItaliaReino Unido2004Repblica ChecaBlgica1981Grecia2004EsloveniaHolandaEspaa2004EstoniaLuxemburgoPortugal2004ChipreAustria-TurquaSuecia2004MaltaFinlandia2007Rumana2007Bulgaria2004Letonia2004Lituania2004Eslovaquia1958197319861995FECHAPASFECHAPASFECHAPASFECHAPASReino UnidoAustriaAustria NoruegaAustriaNoruegaNoruegaSuizaDinamarcaPortugalSueciaIslandiaNoruegaSueciaSuizaLiechtensteinPortugalSuizaIslandiaSueciaIslandiaFinlandiaSuizaFinlandiaLiechtensteinIslandiaLiechtensteinFinlandiaLiechtenstein1973198619601995EFTAEUROPEAN ECONOMIC AREA (EEA)FECHASPASESUE-15 EFTA (menos Suiza)NoruegaIslandiaLiechtenstein1994Types of Regional Trade AgreementsTypes of Regional Trade AgreementsACUERDOSFECHASPASESUSA Canad Mjico Argentina Bolivia Brasil Chile Colombia Ecuador Mjico Paraguay Per Uruguay Venezuela Argentina Brasil Paraguay UruguayNAFTA1994ALADI1980MERCOSUR1991ACUERDOSFECHASPASESBolivia Per Ecuador Venezuela Costa Rica El Salvador Guatemala Honduras Nicaragua Antigua/Barbuda Bahamas Barbados Dominica Granada Guayana Jamaica Montserrat Santa Luca San Cristobal/Nieves San Vicente y Granadinas Trinidad y TobagoPACTO ANDINO1969MERCADO COMN CENTRO-AMERICANO1960COMUNIDAD DEL CARIBE1973Types of Regional Trade AgreementsTypes of Regional Trade AgreementsTheory: Preliminaries Demand curve shows how much consumers would buy of a particular good at any particular price. It is based on optimisation exercise: Would one more be worth price? Market demand is aggregated over all consumers demand curves. Horizontal sum.pricemup*quantityc*cmu”c”Marginal utility curve is the demand curve for one consumer9Theory: Preliminaries Supply curve shows how much firms would offer to the market at a given price. Based on optimisation: Can increase production as long as price you can sell at is equal or above mc. Market supply is aggregated over all firms. Horizontal sum.pricemc”p*quantityMarginal costq*qmcq” 10A firms supply curve is its marginal cost curve.Theory: Preliminaries Since demand curve based on marginal utility, it can be used to show how consumers well-being (welfare) is affected by changes in the price. On the right we have the market demand for a product. Gap between marginal utility of a unit and price paid shows surplus from being able to buy c* at p*.pricep*quantityDemand curvec*Triangle is sum of all gaps between marginal utility and price paid (summed over total consumption)11= MUTheory: Preliminaries If the price falls: Consumers obviously better off. Consumer surplus change quantifies this intuition. Consumer surplus rise, 2 parts: Pay less for units consumed at old price; measure of this = area A. A = Price drop times old consumption. Gain surplus on the new units consumed (those from c* to c); measure of this = area B. B = sum of all new gaps between marginal utility and pricepricep*quantityDemand curvec*pcAB12Theory: Preliminaries Since supply curve based on marginal cost, it can be used to show how producers well-being (welfare) is affected by changes in the price. On the right have the market supply of the product. Gap between marginal cost of a unit and price received shows surplus from being able to sell q* at p*.pricep*quantityq*Triangle is sum of all gaps between price received and marginal cost (summed over total production)13S=MCTheory: Preliminaries If the price rises: producers obviously better off. Producer surplus change quantifies this intuition. producer surplus rise, 2 parts: Get more for units sold at old price; measure of this = area A. A = Price rise times old production. Gain surplus on the new units sold (those from q* to q). Measure of this = area B. B= sum of all new gaps between marginal cost and price.pricep