Economic integration: national firms

1
Economic integration national firms

• Primary aim The design of Regional Integration
  Agreements (RIAs) in case of National Firms and
  monopolistic competition
• How does trade liberalization (RIAs such as the
  EU) affect employment, income and
  self-sufficiency in a peripheral country?
• Trade liberalization is considered as a
  reduction in transportation costs (different
  trade barriers)

2
One central and one peripheral region

• The message
• A moderate reduction of trade barriers (negative
  effect on the peripheral country)
• Complete elimination of trade barriers (positive
  effect on the peripheral country)

3
Hypothetical effects of lowering trade barriers
Prod. costs Ship.costs High Medium Low
Produce in Belgium 10 3 1.5 0
Produce in Spain 8 8 4 0
Produce in both 12 0 0 0
4
Model Two sectors (one perfectly and one
imperfectly competitive) and two regions (i and j)
Inter- and intra-regional trade in imperfectly
competitive sector (manufacturing)
X(ij)
i
j
X(jj)
X(ii)
X(ji)
5
Model

• Pij a 1/sj (1 ? ) Xij/2 ?(ni 1)Xij
  nj Xjj
• Pii b 1/si (1 ? ) Xii/2 ?(ni 1)Xii nj
  Xji
• ?i (Pii ci)Xii (Pij ci - t)Xij fi

6
Overview of the simulations

• Wages equal and fixed in both countries fixed
  AVC
• Short run
• The number of firms fixed in the countries
• Long run
• The number of firms varies in the countries
•  
• Upward sloping supply curve for labour variable
  AVC