ec4333 lecture 2 21.09.2007
TRANSCRIPT
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