Economic Integration

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I. LEVELS OF ECONOMIC INTEGRATION
A. THE FREE TRADE AREA—ALL BARRIERS TO TRADE AMONG MEMBER COUNTRIES ARE REMOVED, BUT MEMBERS MAY DECIDE THEIR OWN TRADE POLICIES TOWARD NONMEMBERS
B. The Customs Union—Free Trade Area plus a common trade policy toward nonmembers
C. The Common Market—Customs Union plus free flow of labor, capital, and technology among members (factor mobility)
D. The Economic Union—Common Market plus integration of economic policies such as monetary policies, taxation, government spending, and a common currency
II. Arguments Surrounding Economic Integration
A. Trade Creation and Trade Diversion
1. Trade creation—increased exports by new member to other members resulting from membership
2. Trade diversion—decreased exports to members of the economic union by nonmember nations often resulting in the advantage shifting away from the lower-cost producer to the higher cost producer
B. Reduced Import Prices can result from importers efforts to remain competitive despite tariffs imposed
C. Increased Competition and Economies of Scale
1. The larger market created also means more competing firms which can result in greater efficiency and lower consumer prices
2. Economies of Scale—lower production costs resulting from greater production for an enlarged market
D. Higher Factor Productivity
1. Factor mobility leads to movement of labor and capital from areas of low productivity to areas of high productivity
2. Poorer countries may lose badly needed investment capital or labor to a more profitable richer country
3. More developed countries may lose companies who move to areas where operating costs are lower
E. Regionalism versus Nationalism
1. The greatest impediment to economic integration is the desire of nations to maintain autonomy
III. European Integration
A. Economic Integration in Europe from 1948 to the Mid-1980s
1. Organization for…...

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