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An article provides a new insight to the modelling of the dynamics of international economic integration
using qualitative properties of an oscillation theory. Proposed method of computing the GDP after
economic integration enables to compute the benefits of economic integration for member states on the
union: one needs to know the rates of domestic savings, amplitudes and frequencies of the cycles of
the value added of sectors for united countries / regions. A new vision of the dynamics of economic
integration proposed in the article is similar to unification of water basins previously separated by
sluices, in which the waves of the value added generated by economic entities, interact with each other.
It was analytically proved that economic integration causes growth of the GDP of unified states.
Keywords: The dynamics of international economic integration; oscillation theory; value added of sectors; GDP;
domestic savings rate
INTRODUCTION
International economic integration is a process of a for- ation and trade diversion effects. After nearly six decades
mal unification of previously separate economic areas: af- of development, the theory of economic integration stays
ter canceling tariff and non-tariff barriers it increases vo- far behind economic practice (El-Agraa, 1998; Balassa,
lume of trade among members of economic union, gene- 1967; Cooper and Massel, 1965; Lipsey, 1957; Meade,
rates more economic activity and thus changes inner 1956; Viner, 1950; Devlin and French-Davis, 1998; Jova-
content of integrated economies towards better welfare. novich, 1998; Tovias, 1994; Robson, 1998). Most ex-
Ability to estimate future benefit of economic integration perts note that the modelling economic integration lacks
of the potential blocs and groupings has always been of the models describing the dynamics of the phenomenon
practical importance. For instance, there is a long-plan- (Winters, 1997; Ruiz Estrada, 2004).
ned FTAA project of Pan-American free trade area, with One of the current approaches to the modelling econo-
mainly political obstacles staying against its implement- mic integration is called Regional Integration Evaluation
tation. Computation of the benefits for the countries invo- Methodology studying different areas of development
lved may stimulate its evolution. The other example may involving political, social, economic and technological
be the Shanghai Organization of Cooperation, currently analysis. Its idea is to demonstrate that the regional de-
consisting of China, Russia and Central Asian states, velopment can affect the evolution of regional integration
which is not an integrated grouping yet: finding potential process based on the application of a group of indexes
benefits here may stimulate steps towards their economic and graphs. The group of indexes and graphs show the
integration too. Such intra- and inter-continental coope- evolution and stages of the regional integration process
ration among different states and groupings worldwide of region from a multi-dimensional analysis (Ruiz Estrada,
certainly needs an estimation of integration’s real value 2004). The General Equilibrium methodology helped to
especially since globalization now became a factor per- develop Gravity Model, Import-Growth Simulation and se-
manently influencing national economic policies. Theory veral other regression models (Mordechai and Plummer,
of international economic integration was originally based 2002).
on Viner’s idea (1950) which considers static case of two Another method in the modelling is the Global Dimen-
integrating states whose trade flows efficiency is com- sion of Regional Integration Model (GDRI-Model) used as
pared with the one for the rest of the world via trade cre- a measuring tool for studying regional integration, apply-
Dalimov 051
ing dynamic and general equilibrium analysis to show the by sluices, in which the waves of the value added gene-
past and present situations in the regional integration pro- rated by economic entities interact with each other.
cess of any region based on a set of indexes and graphs. Further sections of the article provide a brief overview
Its field application is not constrained by region or the de- of pendulum’s simplest oscillations (section II) and the
velopment stage of each member interested in integrating modeling of regional economic dynamics and economic
into a single regional bloc. The GDRI-Model is not used integration (section III). Section IV provides modeling of
for forecasting, mainly focusing on the past and present economic integration for 2004 EU expansion, with results
situations in the regional integration process (Ruiz of simulations presented in the last section V.
Estrada, 2004).
Economic integration assumes merging of at least two
separate different economies, with the process itself Oscillation theory
essentially being dynamic one and hence needing non- The very basics: It considers (Andronov et al., 1949) dy-
static tools applied to the modeling of economic integra- namics of one pendulum with no friction, with the friction
tion. Recently there appeared several articles (Bergin and (Figure 1) and enforced oscillations. One with no friction,
Glick, 2007; Landesmann and Stehrer, 2002; Landes- or the so-called “ideal pendulum”, for y as a variable is
mann and Stehrer, 2006; Tulpule, 2002) in this direction described by the following equation:
both revisiting the issue of modeling economic integration
as well as making overviews and generalizations in its
dynamic modeling. At the same time, one has to admit,
many economists and politicians in their daily practice (1)
seeking to find out specific benefit at forming an econ-
omic union still cannot do it for very reason that they are
unable to implement wide statistic data they posses due Where and T stand for natural frequency and
to a lack of suitable economic model. period of oscillations. Friction, present in the real world,
Present article may help to overcome existing difficul- adds a little change to our initial equation (1):
ties in methodology of economic integration theory based
on oscillation theory approach. Its main advantage is in
the fact that one may use magnitudes taken from real (2)
economy, such as domestic savings rates and values
added of sectors, and make an estimate of potential be- Where j - damping factor representing friction. When os-
nefit for states in case of their possible unification. Ideas cillations of y die out, one may swing them again by app-
and concepts proposed in the article include: lying external force f: it is in the same way how, for in-
stance, we restart clocks, thus inputting there a human’s
i) Definition of the GDP as a difference between sector’s force. Equation (2) now takes the following form:
value added and respective investment.
ii) Consideration of the dynamics of the value added usi-
(3)
ng its oscillating origin.
iii) A formula allowing computation of the GDP after eco- Solution of (3) has an interesting important feature: if f is
nomic integration.
iv) Analytical proof that economic integration causes periodic function of a kind such as , then
growth of the GDP of unified regions. y switches to the frequency of external force Ω and cea-
v) A new vision of the dynamics of economic integration, ses to notice external influence. In other words, dynamics
similar to unification of water basins previously separated of the system in (3) becomes the one like in Equation (2),
052 Afr. J. Mark. Manage.
with new natural frequency Ω . Indeed, if we imagine Conditions (4)-(6) seem obvious and stand for require-
hanging ball which oscillates from one side to the other, ment of economic growth in respective regions. After eco-
then by applying a force of another ball, much bigger than nomic integration, which takes place at the moment of
the first one, the small ball in just a while will oscillate with
the frequency of its bigger counterpart. Actually, it usually time , the GDPs and their respective dynamics
looks like the smaller ball is “glued” to bigger one (Figure will merge:
2).
Modelling regional economic development and econo-
mic integration: It is commonly recognized that one of the (7)
main goals of economic integration is to raise the welfare
of integrated states with expected rate of growth higher
than in case when countries would not integrate; other-
wise there is no reason for economic unification. (8)
The welfare may be characterized by magnitude of
gross domestic product y(x, y, t) per capita. Taken toge-
ther, we may state that finding the terms of the GDP
(9)
growth for the united areas, or during econo-
mic integration, is equivalent to the analysis of the dyna-
mics of economic integration. (10)
We start a modeling by deducting the differential equa-
tion responsible for the dynamics of regional GDP. Then
we will merge regions with attempt to make qualitative Here the last two expressions (9)-(10) stand for require-
analysis of the GDP dynamics due to economic integra- ment of “more” economic growth which should take place
tion. General terms of the modeling the GDP dynamics due to economic integration compared to a case of sepa-
derive from the point that prior to economic integration in rate states without economic unification.
the moment of time t 0 we had dynamics of the GDP for We may further simplify analysis by considering a case of
economic integration between just two neighboring states,
regions I and II as a sum of dynamics of the revenue Yi with each of them having only one industrial sec-tor.
for n and m sectors of respective regional economies: Historically international cooperation between two sectors
was observed within the framework of European Coal
and Steel Union, although historically there were more
than 2 states involved. Currently we may witness such
(4)
cooperation between some Arabian states exporting oil,
serving as a main engine for their economies. The other
country in such a case may be the one which will
(5) consume or process imported oil. In reality such industrial
“partner” for the first state will certainly have in its econo-
my more than one sector, but we may try to model a case
of “2 states ÷ 2 sectors” and then to take into attention
(6) sectors neglected in the beginning.
Dalimov 053
Then we obtain:
(11) (15)
If I is total investment in economy, and Ii is investment in Spatially non-homogeneous allocation of the GDP was
[ ]
sector i, with i ∈ 1; n , we have total investment in eco- examined in a model of inter-regional trade (Puu, 1997).
nomy equal to the sum of current costs in each sector:
(13) (18)
Indeed, every business in the world defines its profit- Let’s differentiate (16) with respect to time and sub-
ability using this very logic first by investing into business stitute values of I, Xn using equations (14), (16)–(18). This
and then selling the goods. If the outcome of its business leads to the following:
activity Yi is positive, it makes profit, and if negative – it
“looses” thus requiring some action to change the trend.
It is assumed that the GDP as parameter of a national
profit may also be defined using such an approach. By
entering (12), (13) in (11) we find that the GDP is equal to
the amount of gross products as a multiplication of price
per output of the goods produced subtracting investments
spent on them, i.e. expenditures:
(20)
(21)
In practice, phases are quite small (see Figs. 3 and Since both parts of (30) are functions of independent va-
riables, with the left one on time and the right one - on
A1). Let be close to nil. Then: spatial coordinates, then equation (30) will be valid only
in case when both sides are equal to the constant. This
(28) gives us two equations separately responsible for tem-
poral and spatial dynamics of the GDP, a=1:
(29)
(33)
(30)
(36)
(31) c) For
or
(32) (37)
056 Afr. J. Mark. Manage.
(39)
Where the summation by j represents the contribution of
(38)
regions, is a year pre-
Where
vious to computed one.
in blns. of US
dollars
1000
500
0
80
83
86
89
92
95
98
01
04
19
19
19
19
19
19
19
20
20
Canada Mexico
15000
10000
5000
0
80
83
86
89
92
95
98
01
04
19
19
19
19
19
19
19
20
20
Table 2. Computed and real GDP of the EU countries prior / after economic integration
in 2004, in mlns. of euro.
(old member states of the EU) grew only for 4.2%. Methodology of calculations shall proceed through
But when it comes to economic unification of compara- building the curves of the value added functions as multi-
tively equal countries we may expect notable increase in plication of price by output PQ for each sector of the EU-
their GDPs (Table 2). These results obtained here 15 and 10 new member states, which will allow measure-
analytically are not new in the theory of economic ing necessary frequencies and amplitudes of their histori-
integration, which mentions higher growth of welfare for cally last oscillations.
smaller states en-tering economic integration by their
bigger counterparts while the latter ones get their benefits Results of the modeling
in the longer run, that is, without significant growth at the
moment of econo-mic integration. Magnitude δ serves as a value showing an increase
Dalimov 059
in the value of the GDP. In equation of the GDP’s ation theory approach using fundamental purpose of
temporal dynamics (Dalimov, 2006), the natural fre- economic integration - an increase of welfare in inte-
grated states. At first, differential equation was de-
quency of its oscillations is equal to ducted responsible for the dynamics of the GDP in
the region. It was found to be similar to the case of
The higher is the natural frequency , the more is
enforced oscillations of attenuated pendulum. The
the growth of the GDP.
“force” which influences the dynamics of the GDP is
Value of δ was found to be equal to 0.7525 from the value added function, analysis of which showed
an inverted task of economic integration in case of its cyclic nature.
Eurasian Economic Community (EvrAzEC) which Method of computing the GDP after economic inte-
was established in 2000 by Belarus, Kazakhstan, gration proposed in the article shows its simplicity
Kyrgyzstan, Russia and Tajikistan. Period of obser- and ability to calculate benefits of economic integra-
vations was 1992-2005: we had calculated δ , know- tion in case of the creation an economic unions: for
ing all the other parameters such as domestic sav- calculation one needs to know the rates of domestic
ings rate, the values added as well as countries savings, amplitudes of the willing to be united, as
GDPs prior to and after economic integration. well as to find frequencies of value added functions
During computation we had to take into account that for the countries / regions oscillations of the value
the savings rates for the 10 new member states of the EU added of sectors.
were equal, and as a consequence these states were Oscillation theory approach gives clear picture on
considered as a whole one region. The computations the dynamics of integrated regions, proposing a new
show (Tables 2) that the aggregate GDP of the EU in insight to the theory and practice of international
2005, that is, after integration, becomes 10,843,084 mil- economic integration. Similarity of the dynamics of
lion euros while the real numbers for this GDP are the value added of sectors within a region and dur-
10,677,432 million euros: the difference between these ing international economic integration to the wave
values is about 1.6%. dynamics in a pool raises a new agenda for further
Respective magnitudes for the GDP of the 10 new research in this area. The least scientists may do is
(2004) EU member states are 504,491 and 539,448 mil- to look for similar patterns between phenomena of
lion euros, with a difference of 6.5% based on the level of non-linear wave dynamics e.g. solitons and the dy-
the real GDP. The reason why the GDP of the EU-15 was namics of the value added within a region. If suc-
raised only to 4.2%, while the GDP of the 10 new mem- cessful, this promises to be a tool in qualitative fore-
bers to 21.5% was the magnitude of the GDP of the 10 casting of economic phenomena in market circum-
new EU member states, more than 20 times less the size stances – really complex and currently unpredictable
of the GDP of the EU-15. world.
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Dalimov 061
Appendix
Figure A1. Correlated movements of price and output of oil in the world.