Lernkarten

• Law of one Price
  • Price of good X should be same in two markets
  • Otherwise, opportunities for arbitrage[1]
• Intra EU trade – Extra EU trade
• Internal Market Scorecard:
  • The Commission publishes this scorecard every year – 4 pages about report on the progress the countries made concerning regulations, directives…

Opening the market to free competition

• Reducing tariffs
• Reducing / eliminating quotas
• Reducing non-tariff barriers.
• Trade liberalisation allows countries to specialise in producing the goods and services where they have a comparative advantage à economic welfare
• Lower prices
• Increased competition. Trade liberalisation means firms will face greater competition from abroad
• Economies of scale: trade liberalisation enables greater specialisation.

• Trade liberalisation often leads to a shift in the balance of an economy. Some industries grow, some decline. Therefore, there may often be structural unemployment from certain industries closing.
• Trade liberalisation could lead to greater exploitation of the environment, e.g. greater production of raw materials, trading toxic waste to countries with lower environmental laws.
• Not good for sectors such as oil, gas and electricity: companies get big --> Monopolies? Or these companies cooperate, not compete, and, so, keep high prices.

• Physical barriers
  • Border controls
• Technical barriers
  • Different product standards (e.g. Product labeling)
  • Public procurement practices
    • Government orders favour domestic firms
• Fiscal barriers
  • Different VAT levels, excise duties
• Examples of Barriers:
  • Customs duties
  • Customs procedures
  • Technical regulations, standards, etc. – e.g. for the purpose of consumer protection, health protection

Policy dictating a minimum of governmental interference in the economic affairs of individuals and society

• One country’s rules must apply throughout the EU.
• If one member determines product is fit for sale, all others obliged to do so as well.
• This is powerful way to overcome non-tariff barriers.

The problem is that government buy more goods from their country than from other countries, not the most efficiency cost.

• It is the buying of goods and services by government organizations.
• Opening up these contracts, which account for a large proportion of the GDP of the EU, has allowed an increase in competition between the enterprises of the European Union, reducing prices and guaranteeing better quality of services for citizens. Over the years, the EU has introduced legislative provisions, which modernise and facilitate the award of contract process. It has increased transparency, fairness and interoperability in this respect.

The good thing about PP is to stimulate economy.

• Positive Competition
  • Allocative Efficiency
    • Scarce resources are used to produce what buyers want
    • Unprofitable firms close: those resources employed by firms that are profitable (so produce things buyers want)
  • Technical or productive efficiency
    • Goods are produced at lowest costs
  • Dynamic efficiency
    • Firms encouraged to find new ways to use resources: innovate
• Perfect competition
  • More gains to consumers

difference between what buyer is willing to pay and what s/he has to pay (market price)

difference between what seller is willing to accept and what s/he receives from a sale (market price)

Prices are lower and quantities sold are higher than with less competition à More total surplus

• No supernormal profits
  • Supernormal profits = profits higher than resources can earn elsewhere for same risk
• Limitation of (perfect) competition
  • Small firms do not have funds to invest in R&D
• Small firms may have higher costs

Increasing the scale of production, leading to a lower cost per unit of output

Increasing the range of products produced by a business reduces the cost of each one (by making efficient use of complimentaries)

• Business cycle fluctuations, especially without policies to balance.
• Unequal income distribution (rich people gain more than poor people)

Reduce and eliminate trade barriers

• Trade Barriers: tariffs & non-tariff barriers
• NTB : regulations, technical differences, fiscal barriers, quotas
• Ongoing process

on completing the internal market

• Puts forward proposals for further integration
• Identified 300 measures to remove barriers

provided support

• Calculating the economic benefits on the integration
• Examining the benefits and costs of creating a single market in Europe
• Weaker firms fail --> Lower costs à Lower prices
• Estimated costs of not reducing internal barriers

Advantages

• Bigger markets --> companies can specialize
• Economies of scale --> lower costs & prices
• Improved efficiency
• More attention paid to what buyers want
• Promote innovation

Disadvantages

• Monopolies may be formed.
• Loss of sovereignty
• Some industries disappear (national industries which not support the pressure of the competitiveness): Ex: National Airlines

1. Negative integration: Eliminating regulations / barriers
2. Positive integration: Harmonisation of regulations & policies

reduction of barriers to trade between economies

Free trade area/association (FTA)

Customs Union (CU)

Common Market (CM)

Economic Union (EcU)

Total Economic Union (TEcU) (Political Union)

• Members eliminate trade barriers with each other
• Members maintain own policies against non-members
• No positive integration
• EFTA, NAFTA

• CU  = FTA + common external tariffs
• Suppression of discrimination against CU members
• No positive integration
• Mercosur

• CM = CU + free movement of capital and labour
• A CU which abolishes restrictions on movements of factors of production
• No positive integration, ‘four freedoms’, EU-28

• CM with some degree of harmonization of national economic policies
• Positive integration introduced

• Unification of monetary, fiscal, social and countercyclical policies
• Supranational regulatory
• USA

Static effects (short term)

• Trade Creation: Gains due to shift of production from higher cost producer to lower cost producer.
• Ex: Before 2004, Netherlands imports machine tools from UK, due to NL tariffs against Polish imports…
• Trade diversion: Trade being diverted away from a more efficient supplier in a non-member country, towards a less efficient supplier in one of the member countries.

Dynamic effects (long-term)

• Firms serve larger markets so grow and specialize à economies of scale: lower costs
• More incentive to innovate and larger firms have more profits to allow it.

One act of integration triggers another

Due to the increased vulnerability of the countries outside the trade bloc in terms of trade flows.