Type: Process Essays
Sample donated: Marshall Jackson
Last updated: October 2, 2019
Thepurpose of this paper is to explain European Regional Integration and Trade.This paper examines that European Reg?onal Integration, Three Theories ofRegional Integration, Trade, Big Mac Index, Purchasing Power Index and PaulKrugman Index. It can be said that theword European refers in principle to the whole geographical entity of Europe.
Nowadays, one of the mostcharacteristic aspects of economic development is progressive integration inEurope where it has found in the European Union (EU). EU has an influence onthe economy of member stataes and third countries (Molle, 2006, pp.3).
A lot ofschool of thoughts have been comprised for many years. The discussion oneconomic integration was related to international economic relations in the1950s and 1960s. Especially in the 1970s and 1980s, the opnion of economicintegration quickly spread to the economics of the sectors whcih are energy,agriculture, manufacturing, transport and services. From the point of the viewof the economics of the sectors of economic activity is connected with marketregulation, macro-economic equilibrium, monetary control, regional equilibriumor social welfare.
The discussion on European economic integration ishighlighted by the issues of the completion of the internal market and therealisationof monetary integration at the end of the 1980s and during the 1990s(Molle, 2006, pp.3). 1. European RegionalIntegrationThe general frameworkfor understanding regional integration begins with a discussion of the factorsdeterminnig the outcome of regional integration schemes.
This is followed by anexamination of the results of integration for outsiders (Mattli, 2001, pp.41).For integration, twotypes of condition need to be satisfied in order to succeed. First, economicgains from market exchange within a region must be really important. Marketplayers will have an incentive to have an interview for regional institutionalarrangements. The demand of regional rules, policies and regulations which isby market players is a supporter of integration (Mattli,2001, pp.
42). Second,there must be a performance of supply conditions. The conditions which areconnected with willing political leaders able to accommodate demands forregional institutions which are for integration process (Mattli, 2001, pp.42).
Regional integration iswidely known that it is the process of providing common regulations, rules andpolicies for a region. Institutional theories which are property-rights theory,economic history, new institutional economics, provide useful insights intothis process. These theories are related to explaining the evolution localinstitutional arrangements (Mattli,2001, pp.44). 2. Three Theories of Regional Integration 3. TradeTransaction costs arestated that they are the costs of specifying, negotiating, monitoring andenforcing contracts that underlie exchange.
That is to say, they are the costsof capturing the gains from market exchange (Mattli, 2001, pp.45).Trade theorists arguethat for instance that larger markets usually help firms achieve economies ofscale in production. Also another argument is known that trade is usefulbecause of permitting countries to exploit their comparative advantage. Acomparative advantage derives when the marginal opportunity costs of producingone good in terms of another good differ between countries. Therefore a countryobtains from specializing in the production and export of producing low costgoods (Mattli, 2001, pp.
46).The costs ofinternational trade and investment transactions can also be prohibitive. Thesituation has several risks.
Uncertanity such as civil unrest or economicmismanagement many render foreign assets or trade-related domestic investmentworthlesss is one of those risks. Late deliveries, unexpected price hikes,poor-quality goods, tarif changes, tariff barriers, differing rates ofinflation, devaluations or foreign exchange restrictions to balance paymentproblems are other important risks. Also measures include profit remittancecontrols, local equity obligations, export performance requirements, forcedsales, licensing restrictions, forcedpartnerships, financing restrictions, local content requirements, restrictedmarkets, export quotas, tax discrimination, superrvision of transfer prices andthe prevention of local acquistion (Mattli, 2001, pp.47-48).The aim of firms canfind to minimize transaction costs (Mattli, 2001, pp.48).New sights are offeredby new theoretical trade and growth models.
Both of them are based on constantreturns to scale and competition. However, these are based on increasingreturns to scale and incomplete competition and also comment economicintegration. The continuing economic pressure, increasing competition andrestructuring withiin particular sectors could make difficult for regions(Boden, Morgenroth and Petrakos, 2008, pp.
1).The interest amongpolicy makers and the public on impact of economic integration is expected to result in winners and losersamong the different regions. Thus, one of the European Union’s priorities isbetter economic and social cohesion. The enlarged European Union may require a reorientation of choesionpolicy at European, national and local levels for at least three reasons.
Firstone is that the distribution of the integration gains may have a long-term impact on welfare.Second one is that short-term adjustment costs may be impliedby the relatedregional structural change. The last but not the least one is that theintegration induced increase of regional specialisation may escalateindustry-specific shocks probability.
To sum up, the economic cohesion may beaffected at the European Union and national levels (Boden, Morgenroth and Petrakos, 2008, pp.2).Economic integrationutilise in terms of both an economic and a political nature. The core benefitsare related to economic welfare, peace and security, democracy and human rights(Molle, 2006, pp.4). The economic logic ofmarket integration is mostly grounded on welfare economics.
Actually, the freeExchange of goods promises an advantage on the prosperity of all concerned.Choosing the cheapest good, enlarging the choice and creating the conditons forgain through economic of scale are some of the advantages. However, freemovement of production factors permits optimum allocation of labour and capital(Molle, 2006, pp.9).It is a commonknowledge that there are three stages of markets which are Free-trade area(FTA), Customs union (CU) and Common market (CM).
Free-trade Area (FTA) · All trade impediments which are import duties and quantitative restrictions are abolished among members. · Internat goods traffic is free, but each country can apply its own customs tariff with compared to thrd countries. Otherwise with the tariffs removed between the other countries an exporting company would simply export all the goods for the European Market into the country with the lowest external tariff.
Customs union (CU) · CU has some functions which eliminates custom, imposees a common external tariff system and creates common border control. · CU has ultimate goals which are free movement of goods, capital and people and also the harmonization of macroeconomic and structural policies. · The member countries in agreement to lower trade barriers between each other. Common market (CM) · An internal market: free internal movement of products (goods and services) and production factors (labour and capital) · Common external regulation for both products and production factors. Free-trade Area (FTA),Customs union (CU) and Common market have also some differences: Features FTA Customs Union Common Market In Member Free Trade Yes Yes Yes Factor Mobility Across Borders No No Yes Common Economic Policies amongst members No No No Common External Barriers with non members No Yes Yes In addition to marketstages, there are three forms of integration of economic policy. These areEconomic Union (EU), Monetary Union (MU) and Economic and monetary nion (EMU)combines. Economic Union (EU) · European nion is established through trade pact.
· Centralising macroeconomic policies particularly in terms of fiscal policy. Otherwise common market with common determination of some structural and macroeconomic policies. · Full integration of member economies (common policy) Monetary Union (MU) · Countries share the same currency and have a common monetary policy. Economic and Monetary Union (EMU) · The single currency and the euro area · Coordination of economic policy-making betweeen Member States · Combines the charecteristics of the economic and the moner-tary union.
· Coordination of fiscal policies · An independent monetary policy run by the European Central Bank (ECB) Political Union (PU) and Full Union (FU) are of integration other policies. Political Union (PU) · The most fully integrated forn of regional cooperation. · It includes complete political and economic integration. · In brief, including security policy.
Full Union (FU) · It implies the complete unification of the economies involved and also a common policy on many significant matters. The European Union hascertain characterizes as a monetary union. These are European Central Bank(ECB), European Economic Community (EEC), the four freedoms of the EU are thefreedom of movement of goods, people, services and capital over boarders andcommon polices on product regulation. Monetary Union hascertain advantages. Exchange rate fluctuations disappearing, more stabilityagainst speculations, business confidence improves, internal trade growth,elimination of transaction costs and price equalization across borders areadvantages of Monetary Union. Different stages ofintegration have different criteria for participation. These stages are Free TradeArea, Common Market, Economic Union and Monetary Union. The criteria of FTA arehigh Exchange of goods and services, equality of production structure, equalityof economic order.
The criteria of CM are equality of markets for labour andcapital, freedom of movement (migration and investment) and convergence policy(taxes). The criteria of EU are effective coordination, comparability ofinstitutions and transfer payments. The criteria of MU are production factormarkets and institutional development (Molle, 2006, pp.
25).The formalinstitutional framework of the European Union consists of some ten differentbodies. The five of them are really important institutions of the EU which arethe Council, the Commision, the Parliament, the Court of Justice and theEuropean Council. The other institutions are the Court of Audtors, the EuropeanCentral Bank, the European Investment Bank, the Economic and Social Committeeand the Committee of the Regions. The Commission has major tasks which areinitiation of actions, execution of policies, implementation of the budget andenforcement of the laws.
4. Big Mac Index,Pruchasing Power Index and Paul Krugman New Trade TheoryBigMac Index is developed by the economist in 1986 and the index is based on thetheory of Purchase-Power-Parity (PPP) and also it measures PPP between twocurrencies instead of a “basket of goods”. The index takes its name from the Big Mac which is a hamburger sold atMcDonald’s restaurants. Actually, in some countries McDonalds is more expensivethan eating from local restaurant and also consumer preference and choice isnot the same in every country. Except Big Mac Index, some index is used by manyfirms.
For example, Tall Latte Index is used Starbucks. As well as this one,Australian banks wanted to use Apple Ipod as an index which should be moreconsistent since the good is produced in one location. The other one is thatBloomberg L.P. introduced the Billy Index.
Local prices of Ikea’s BillyBookshelf into US dollars are converted and the prices are compared. Accordingto Big Mac Index, currencies continue to be cheap in the developing world, butovervalued in Europe.Thisadjusted index relates to the criticism which is expected average burger pricesto be cheaper in poor countries than in rich countries because of lower labourcosts.
Purchase-Power-Parity (PPP) signals where exchange rates should beheading in the long run and also it says little about today’s equilibrium rate.The relationship between prices and Gross Domestic Produce (GDP) per person maybe a better guide to the current fair value of a currency. The adjusted indexuses Big Mac prices and GDP per person for 48 countries which are added theeuro area. The difference between the price predicted by the red line for eachcountry, given its income per person, and also its actual price gives a measureof currency under and over-valuation. Forexample, the price of a Big Mac was $ 5.5 in the United States. The price of aBig Mac was € 4.
0 in Germany. The implied purchasing power parity was $1.75 to € 1.15, that is $ 5.5/ € 4.
0 = 1.38. Compareswith an actual Exchange rate of $ 1.75 to €1.15 (or $ 1.
85 to €1). The euro was thus overvaluedagainst the dolar by 34.1% at the time (1.
85-1.38)/1.38*100% = 34.1%.
The eurowas thus overvalued against the dolar by 34.1%.The index has certain limitationswhich are commercial environment, local taxes, population of the McDonald’s,customers hobbit, levels of competition, the country’s economy and importduties. Taking everything into account, it is a methodology determine theexchange rate by the hamburger.
In addition, anybody can’t buy a cheap burgerin Germany and eat it in New York. Thus, in 2013 Mini Mac Index was created.The Index compares the price of iPad minis across countries.
Because it is aglobal product unlike Big Macs, it can move quickly and cheaply around theworld. Indeed, both indexes show the dollar overvalued against most currencies.Whereas the Big Mac Index puts the average overvaluation at 24 percent, MiniMac Index puts it at only 7 percent. The brief is that Purchasing Power Parity(PPP) bases on a single product.
Though the Big Mac is just one product, it isa combination of many other products such as bread and meat and also plusinputs such as labor and rent.Another important theory is that NewTrade Theory was developed by Paul Krugman in the late 1970s. It is a generallyknown fact that every country has a comparative advantage in at least one goodor service. According to Krugman Theory, countries would be better off if theyfocus on producing the specific good or service where they have a comparativeadvantage nad trading for others. The theory encourages international trade.
Initially,producers of goods and services want to maximize profits. According to Krugman,lower tariff barries improved telecommunications, cheaper air transport has reducedthe disadvantages of producing in developing countries. Krugman’s concepts of creatingbalance among nations is evident through his reasonable ideas of strategic developmentof 3rd world countries.Krugman’s new trade theory stands outas the one which seems to better explain the fundamentals of the present trade patterns,resembling monopolistic competition market pattern based on product differentiation,product loyalty, competitive pricing, dominance of some big firms and tending towardoligopoly. Also the theory well explains the dynamics of trade, such as consumerpreferences for varieties of similar goods, for developing to benefit from (Ahmed,2012, pp. 1563).
5. Conclusion A common currencyreduces transaction costs and also removes trade barriers.Market integration isneeded because of improving efficiency and thus welfare. In addition policyintegration is needed because the intervention of national governments inmodern mixed open economies has lost its effectiveness. 6. SourcesMattli, W. (2001).
The Logic of Regional Integration. United Kingdom: Cambridge. Molle, W. (2006). The Economics of European Integration. England: Ashgate.https://www.slideshare.net/IAmAmeya/fta-customs-union-common-market-trade-diversification-trade-creation?qid=51a4049b-ac3f-4485-91b8-28669afb0558===6http://www.economist.com/content/big-mac-index