OUR LADY OF THE PILLAR COLLEGE CAUAYAN

COLLEGE OF ACCOUNTANCY
INTERNATIONAL, BUSINESS AND TRADE

MODULE 6:
THE ECONOMIC INTEGRATION AMONG COUNTRIES

Economic integration

 is an arrangement among nations that typically includes the reduction or elimination of trade
barriers and the coordination of monetary and fiscal policies. Economic integration aims to
reduce costs for both consumers and producers and to increase trade between the countries
involved in the agreement.
 is sometimes referred to as regional integration as it often occurs among neighbouring
nations.
 Economic integration, or regional integration, is an agreement among nations to reduce or
eliminate trade barriers and agree on fiscal policies.

Arguments Surrounding Economic Integration

They center on:

 Trade Creation and Diversion

 The Effects of Economic Integration on import prices, competition, economics of scale and factor
productivity

 Trade creation and Diversion

 Trade creation is the increased trade that occurs between member countries of trading blocs
following the formation or expansion of the trading bloc. This comes about as the removal of
trade barriers allows greater specialisation according to comparative advantage. This means
that prices can fall and trade can thus expand.
 Trade diversion is the decrease in trade following the formation of a trading bloc as trade with
low cost non-trading bloc members is replaced by trade with relatively high cost trading bloc
members.
 Trade creation and diversion are important direct effects of the formation of a customs union

When customs unions are established the flow of trade between countries involved in the new
union and those outside will be affected. Customs unions eliminate barriers to trade between
members, which is assumed to provide a considerable incentive to increase trade between
members and to reduce trade between members and non-members. It is often easiest to
appreciate the effect of a customs union by considering what happens when one country joins
an existing union.

 Import Prices

 An import price index measures changes in the prices of imports of merchandise into a
country. The index numbers for each reference period relate to prices of imports landed into
the country during the period
 The taxes or duties imposed on imports are known as tariffs. Tariffs increase the price of
imported goods in the domestic market, which, consequently, reduces the demand for them.

THE ECONOMIC INTEGRATION AMONG COUNTRIES Page 1

 OUR LADY OF THE PILLAR COLLEGE CAUAYAN
COLLEGE OF ACCOUNTANCY
INTERNATIONAL, BUSINESS AND TRADE

 Competition

 Economic integration will promote competition. Integration will indeed enhance competition if the
foreign firm is the low cost producer. But if the foreign firm is the high cost producer, integration
will retard competition if the initial tariff level is low. The results of this paper suggest that trade
liberalization does not always provide competitive discipline. Competition policy must still be
actively enforced even when economies are becoming increasingly open.
 Economic and Political integration by presenting a model in which firms compete with each other
in both an economic market where they produce a good and compete for market share and in a
political (rent seeking) market where they compete for transfers from the government. Growth is
driven by firms' cost-reducing innovation activity and economic and political integration affect firms'
incentive to innovate differently. In this setting, economic and political integration can be seen as
complementary. Economic integration, when not accompanied by political integration, can lead to
less innovation and slower growth as firms respond to increased competition in the economic
market by focusing more on rent-seeking activity. When economic integration is accompanied by
political integration, innovation and growth will be stronger and welfare higher.

 Economics of scale

 Refers to the cost advantages that an enterprise obtains due to expansion. There are factors
that cause a producer's average cost per unit to fall as the scale of output is increased.
Economies of scale are a long run concept and refer to reductions in unit cost as the size of a
facility and the usage levels of other inputs increase. An economy of scale is also a justification
for economic integration, since some economies of scale may require a larger market than is
possible within a particular country.

 Factor Productivity
 Refers to how much output a company can generate with a given amount of input.
Labor productivity, or how productive a company's workers are, is an important factor for
ongoing profitability.
 Higher productivity can lead to: Lower unit costs: These cost savings might be passed onto
consumers in lower prices, encouraging higher demand, more output and an increase in
employment.

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