EC433 Lecture 2Stephen Kinsella

HistoryBudget

CU TheoryEnlargement

Last Week

EU is an economic solution to a political Problem

Today’s Main Message

“History affects current spending priorities and affects the path of economic integration”

4

1. Formation of the Customs Union, 1958- 1986

2. Single Market program, 1986-1992

3. European Economic and Monetary Union, 1992-present

3 big increases in EU economic integration

Stage of Integratio

n

No Internal Barriers

Common External

Tarrif

Factor+Asset Mobility

Common Currency

Common Ec. Policy

FTA X

CU X X

Single Mkt X X X

Monetary Union

X X X X

Economic Union

X X X X X

Budget

Budget Priorities

4%6%

7%

8%

32%

42% Research AdminOther AidRegional CAP

1.27% of

GDP

Transaction Cost Ecs

For the Firm

Costs of compliance with contracts, social conventions, supply-chain problems.

Phases of Ec. Integration

EMU

Common Mkt

Economic Union

Customs Union

Free Trade Area

Integration

Costs from

Fragmented

Markets

Legal,

Regulatory

Costs Macro Costs

Source: McDonald & Dearden, pg. 44

Why is Trade good?

What is FreeTrade?Absence of tariffs, quotas, or other governmental impediments to international trade allows each country to

specialize in the goods that it can produce cheaply and efficiently relative to other countries.

SO?

Trade Creation

But first...

Price, €

Quantity, (Items)

Supply Schedule

Demand Schedule

Eq. Price, P*

Eq. Quantity, Q*

CS

Trade Creation is

“The increase in trade volume caused by union with a lower cost (more efficient) supplier within the trade bloc”

––Viner, 1950

Punion post tax

Pworld post tax

Pworld pre tax

Punion pre tax

Supply Home

Demand Home

P*

C*

P

QB D

E F G

Trade Creation (High Cost to Low Cost)

Punion post tax

Pworld post tax

Pworld pre tax

Punion pre tax

Supply Home

Demand Home

P*

C*

P

QB D

Trade Diversion (Low Cost to High Cost)

CU Good iff

• TC > TD

€ (bn) % GDP

(a) (b) (a) (b)

Barriers to trade 8 9 0.2 0.3

Technical Regs 57 71 2.0 2.4

Ecs. of Scale 60 61 2.0 2.4

X-inefficiency 46 46 1.6 1.6

Total 171 187 5.8 6.4

At 1985 Prices Source: Cecchini Report, Emerson et al, 1988.

Effects of Economic Union

1. Location Effects

2. Accumulation Effects

3. Allocation Effects

Price Dispersion(coefficient of variation)

1985 1993 1996% % %

Private Final Consumption 21.9 15.9 15.9Government final cons. 25.4 25.9 27.2

Gross fixed capital formation 12.8 14.5 13.5Construction 19.2 23.6 22.0

Machinery 9.1 6.7 7.7GDP 20.1 16.2 16.3

Beach on the Enlargement

If you only read one thing...

El-Agraa, A.M., (2002), The European Union: Economics and Policies, 6th ed., pgs. 149–164,

337.142 AGR.

Thanks