Ec4333 Lecture3 2007 Slide Share

1. EC433 Lecture 2 Stephen Kinsella History Budget CU Theory

2. Last Week EU is an economic solution to a political Problem

3. Today’s Main Message “History affects current spending priorities and affects the path of economic integration”

4. 3 big increases in EU economic integration 4

5. 3 big increases in EU economic integration 4

6. 3 big increases in EU economic integration 1. Formation of the Customs Union, 1958- 1986 4

7. 3 big increases in EU economic integration 1. Formation of the Customs Union, 1958- 1986 2. Single Market program, 1986-1992 4

8. 3 big increases in EU economic integration 1. Formation of the Customs Union, 1958- 1986 2. Single Market program, 1986-1992 3. European Economic and Monetary Union, 1992- present 4

9. Stage of No Common Factor Common Common Integratio Internal External +Asset Currency Ec. Policy n Barriers Tarrif Mobility FTA X CU X X Single Mkt X X X Monetary X X X X Union Economic X X X X X Union

10. Budget Priorities

11. Budget Priorities

12. Budget Priorities Research Admin Other Aid Regional CAP

13. 1.27% of GDP

14. Transaction Cost Ecs For the Firm Costs of compliance with contracts, social conventions, supply-chain problems.

15. Phases of Ec. Integration EMU Integration Common Mkt Economic Union Customs Union Free Trade Area

16. Phases of Ec. Integration EMU Integration Common Mkt Economic Union Customs Union Free Trade Area

17. Source: McDonald & Dearden, pg. 44

18. Costs from Fragmented Markets Legal, Regulatory Macro Costs Costs Source: McDonald & Dearden, pg. 44

19. Costs from Fragmented Markets Legal, Regulatory Macro Costs Costs Source: McDonald & Dearden, pg. 44

20. Why is Trade good?

21. What is FreeTrade?

22. What is FreeTrade? Absence of tariffs, quotas, or other governmental impediments to international trade

23. What is FreeTrade? Absence of tariffs, quotas, or other governmental impediments to international trade SO?

24. What is FreeTrade? Absence of tariffs, quotas, or other governmental impediments to international trade allows each country to SO? that it can produce specialize in the goods cheaply and efﬁciently relative to other countries.

25. Trade Creation

26. But ﬁrst...

30. Price, €

31. Price, € Quantity, (Items)

32. Price, € Quantity, (Items)

33. Price, € Demand Schedule Quantity, (Items)

34. Price, € Demand Schedule Quantity, (Items)

35. Price, € Supply Schedule Demand Schedule Quantity, (Items)

38. Price, € Supply Schedule Eq. Price, P* Demand Schedule Quantity, (Items)

39. Price, € Supply Schedule Eq. Price, P* Demand Schedule Quantity, Eq. Quantity, Q* (Items)

40. Price, € Supply CS Schedule Eq. Price, P* Demand Schedule Quantity, Eq. Quantity, Q* (Items)

41. Trade Creation is “The increase in trade volume caused by union with a lower cost (more efﬁcient) supplier within the trade bloc” ––Viner, 1950

42. Trade Creation (High Cost to Low Cost) B D

47. Trade Creation (High Cost to Low Cost) Supply Home B D

48. Trade Creation (High Cost to Low Cost) Supply Home Demand Home B D

49. Trade Creation (High Cost to Low Cost) P Supply Home Demand Home B D

50. Trade Creation (High Cost to Low Cost) P Supply Home Demand Home Q B D

53. Trade Creation (High Cost to Low Cost) P Supply Home P* Demand Home Q B D

54. Trade Creation (High Cost to Low Cost) P Supply Home P* Demand Home Q B C* D

57. Trade Creation (High Cost to Low Cost) P Supply Home P* Pworld pre tax Demand Home Q B C* D

58. Trade Creation (High Cost to Low Cost) P Supply Home P* Punion pre tax Pworld pre tax Demand Home Q B C* D

63. Trade Creation (High Cost to Low Cost) P Supply Home Punion post tax P* Punion pre tax Pworld pre tax Demand Home Q B C* D

64. Trade Creation (High Cost to Low Cost) P Supply Home Punion post tax Pworld post tax P* Punion pre tax Pworld pre tax Demand Home Q B C* D

65. Trade Creation (High Cost to Low Cost) P Supply Home Punion post tax Pworld post tax P* Punion pre tax E Pworld pre tax Demand Home Q B C* D

66. Trade Creation (High Cost to Low Cost) P Supply Home Punion post tax Pworld post tax P* Punion pre tax E F Pworld pre tax Demand Home Q B C* D

67. Trade Creation (High Cost to Low Cost) P Supply Home Punion post tax Pworld post tax P* Punion pre tax E F G Pworld pre tax Demand Home Q B C* D

68. Trade Diversion (Low Cost to High Cost) B D

73. Trade Diversion (Low Cost to High Cost) Supply Home B D

74. Trade Diversion (Low Cost to High Cost) Supply Home Demand Home B D

75. Trade Diversion (Low Cost to High Cost) P Supply Home Demand Home B D

76. Trade Diversion (Low Cost to High Cost) P Supply Home Demand Home Q B D

79. Trade Diversion (Low Cost to High Cost) P Supply Home P* Demand Home Q B D

80. Trade Diversion (Low Cost to High Cost) P Supply Home P* Demand Home Q B C* D

83. Trade Diversion (Low Cost to High Cost) P Supply Home P* Pworld pre tax Demand Home Q B C* D

84. Trade Diversion (Low Cost to High Cost) P Supply Home P* Punion pre tax Pworld pre tax Demand Home Q B C* D

89. Trade Diversion (Low Cost to High Cost) P Supply Home P* Punion post tax Punion pre tax Pworld pre tax Demand Home Q B C* D

90. Trade Diversion (Low Cost to High Cost) P Supply Home P* Punion post tax Pworld post tax Punion pre tax Pworld pre tax Demand Home Q B C* D

95. CU Good iff • TC > TD

96. € (bn) % GDP (a) (b) (a) (b) Barriers to 8 9 0.2 0.3 trade 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.

97. Effects of Economic Union 1. Location Effects 2. Accumulation Effects 3. Allocation Effects

98. Price Dispersion (coefficient of variation) 1985 1993 1996 % % % 21.9 15.9 15.9 Private Final Consumption 25.4 25.9 27.2 Government final cons. 12.8 14.5 13.5 Gross fixed capital formation 19.2 23.6 22.0 Construction 9.1 6.7 7.7 Machinery 20.1 16.2 16.3 GDP

99. Beach on the Enlargement

100. 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.

101. Thanks

Ec4333 Lecture3 2007 Slide Share

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