fin/bus

Economic Integration

American Public University System

Dr. Xiaodong Wu

August 23, 2013

Economic Integration of the European Free Trade Association

Economic integration is the merging of economies to create a block of countries that have a larger economic impact on global trade and has a leveling effect on the associated economies. Integrated economies have many benefits to the associated economies but there are risks that are involved to the member countries. The European Free Trade Association (EFTA) was officially started in 1960 when Norway and Switzerland signed the agreement (EFTA, 2013). Iceland and Liechtenstein joined later to create an association that had a combined GDP of € 723,685,000 ($968,362,898.50 U.S.) in 2011. With a combined population in 2011 of just over 13 million people, the populations of the member countries are just under the total population for the State of New York (United States Census Bureau, 2013). The decision to integrate the economies was made after reviewing the following advantages and disadvantages:

Table 1
Pro’s	Con’s
Faster growth	Startup for small companies is more difficult
Increases in standard of living	The poor do not benefit as much as everyone else
Reduces exchange rate risk	Loss of revenue
Stronger economies	Loss of sovereignty

Source: (Oshikoya)

Overcoming the Disadvantages

The EFTA States have a huge amount of natural resources. With the limited population and strong GDP, the EFTA does not have as many problems with the disadvantages that other integrated economies face. Wage inequality in a heterogeneous market happens based on workforce composition (Akerman, Helpman, & Itskhoki). With integrated economies workers at the lower edge of the economic scale may find it harder to prosper. Having a smaller population base and a high GDP allows the member countries to spend on social programs that benefit the populations. The loss of sovereignty has been a concern with integrated economies. The EFTA members are insulated from some of the negative effects of crashing economies due to the abundant natural resources.

Summary

The European Free Trade Association (EFTA) member states of the Republic of Iceland, Principality of Liechtenstein, Kingdom of Norway, and Swiss Confederation have created a strong integrated economy. The integration has helped to produce growth in the respective economies. The member states all have abundant natural resources and low population which minimizes the potential disadvantages. The EFTA has been positioned to take advantage of globalization by creating more trade agreements around the globe. The strong economies and high per capita income allows the EFTA member states to work in unison on trade agreements that encourage globalization. The member states have become financially secure by following policies that promote economic integration.

References:

Akerman, A., Helpman, E., & Itskhoki, O. (n.d.). Sources of Wage Inequality. Retrieved from Havrvard.edu: http://scholar.harvard.edu/files/helpman/files/sources_of_wage_inequality.pdf

EFTA. (2013). The EFTA States. Retrieved from EFTA: http://www.efta.int/about-efta/the-efta-states.aspx

Oshikoya, T. W. (n.d.). Achieving Growth Through Integration. Accra: West African Monetary Institute.

United States Census Bureau. (2013, June 27). New York. Retrieved from U.S. Department of Commerce: United States Census Bureau: http://quickfacts.census.gov/qfd/states/36000.html