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The Single Market

The Single Market

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Published by hishamsauk

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Published by: hishamsauk on Mar 21, 2011
Copyright:Attribution Non-commercial

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12/16/2012

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E
UROPEAN
E
CONOMICS
: T
HE
S
INGLE
M
ARKET
 
E
CONOMIC
I
NTEGRATION
Four steps to an Economic Union:
1)
Free
T
rade
rea
 
² 
Free Trade betweenmember states.
2
)
Customs Union
² 
FTA + Common ExternalTariff.
3
)
Common M
arke
t
² 
CU + Free mobility of Factors of production.
4
)
Economic Union
² 
CM + Common EconomicPolicy.
A CU prevents
Trade Deflection
² 
importersgoing through the country with the lowest tariff.
 
E
CONOMIC
I
NTEGRATION
Two static effects of a CU:
T
rade
C
rea
tion
:
y
W
elfare change due to switchingfrom high cost domestic producers tolower cost imports.
T
rade
Div
er
sion
:
y
W
elfare change due to switchingfrom low cost imports to higher costimports.
The diagram shows both theseeffects. Three regions; Country A,Country B,
W
orld.
Initially, A produces O
² Q2
andimports
Q2
 
² Q3
from
W
orld.
A + B form a CU. Assume P
w+t
>CET > P
B
A now
p
r
o
d
uc
e
s l
e
ss
: O
² Q
1, and
im
p
o
r
ts mo
re
 
Q
1
² Q4
from B.
Three effects at play:
y
Trade Creation (Red Triangle)
y
Trade Diversion (Black Rectangle)
y
Consumption Effect (YellowTriangle)
S
S
W
D
S
B
S
W
+t
P
W
+t
P
B
P
W
Price
Q
uantity
Q
1
Q2 Q3Q4

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