ECONOMIC INEGRETION GLOBLE ECONOMIC & FINANCEA PROJECT SUBMITTEDTO THE UNIVERSITY OF MUMBAIFOR THE DEGREE OF MASTERS IN COMMERCESEMESTER - 1IN THE PARTIAL FULFILLMENT REQUIREMENTOF THE COURSE (ACADEMIC YEAR 2015-16)BYRAHUL P. CHUDASAMAROLL NUMBER:-UNDER THE SUPERVISION OF PROF:-MEDHAVINI KHARE KIRAN JHADAVDEPARTMENT OF MCOMBHARTIYA VIDYA BHAVANSHAZARIMAL SOMANI COLLEGE OF ARTS AND SCIENCEDATE PLACE - MUMBAI

SIGN OF EXTERNAL SIGN OF INTERNAL SUPERVISOR SUPERVISOR CERTIFICATEThis is to certify that this project report entitled GLOBAL ECONOMICS Submitted by RAHUL P. CHUDASAMA in partial fulfillment of the requirement for the degree Master of Commerce (M.Com) Part 1 (Semester 1) is a bonafide research work completed under my guidance and supervision .No part of this project has ever been submitted for other degree .the assistant rendered during the course of the study has been duly acknowledged.

External Examiner Internal Examiner

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DECLARATION

Certified that I RAHUL P CHUDASAMA of Master of Commerce (M.com) Part 1 (Semester 1) have prepared titled Global Economics Under the guidance of Prof. MEDHAVINI KHARE and KIRAN JHADAV. Department of Commerce Bhavans Hazarimal Somani College. Chowpatty, Mumbai in partial fulfillment of the requirement for the degree of Master of Commerce (M.com). Their by no part of this project has ever been submitted any other degree.

RAHUL P. CHUDASAMA Roll No. M.com (part-1)

INDEX

Sr.no. Contents

1Introduction

2Definition

3Objective

6Stages

7Economic Theory

8Success Factor

9Obstacle of global economic

10Global economic integration

11Financial integration

12Advantages & Disadvantages

ECONOMIC INTEGRATIONEconomic integrationis the unification of economic policies between different states through the partial or full abolition of tariff and non-tariff restrictions on trade taking place among them prior to their integration. This is meant in turn to lead to lower prices for distributors and consumers with the goal of increasing the level of welfare, while leading to and increase of economic productivity of the states.The trade stimulation effects intended by means of economic integration are part of the contemporary economicTheory of the Second Best: where, in theory, the best option isfree trade, withfree competitionand notrade barrierswhatsoever. Free trade is treated as an idealistic option, and although realized within certain developed states, economic integration has been thought of as the "second best" option for global trade where barriers to full free trade exist.

DEFINITION OF ECONOMIC INTEGRATIONAn economic arrangement between different regions marked by the reduction or elimination of trade barriers and the coordination of monetary and fiscal policies. The aim of economic integration is to reduce costs for both consumers and producers, as well as to increase trade between the countries taking part in the agreement.

The combination of several national economies into a larger territorial unit._ It implies the elimination of economic boardersbetween countries._ Economic borders: any obstacle which limits the mobility of goods services and factors of production between countries. Jan Tinbergen: all processes of economicintegration include two aspects: Negative integration: the elimination of obstacles. Positive integration: harmonization, coordination ofexisting instruments.

OBJECTIVESThere are economic as well as political reasons why nations pursue economic integration. The economic rationale for the increase of trade between member states of economic unions that it is meant to lead to higherproductivity. This is one of the reasons for the global scale development of economic integration, a phenomenon now realized in continentaleconomic blockssuch asASEAN,NAFTA,SACN, theEuropean Union, and theEurasian Economic Community; and proposed for intercontinental economic blocks, such as theComprehensive Economic Partnership for East Asiaand theTransatlantic Free Trade Area.Comparative advantagerefers to the ability of a person or a country to produce a particular good or service at a lowermarginalandopportunity costover another. Comparative advantage was first described byDavid Ricardowho explained it in his 1817 bookOn the Principles of Political Economy and Taxationin an example involving England and Portugal.[3]In Portugal it is possible to produce bothwineandclothwith less labour than it would take to produce the same quantities in England. However the relative costs of producing those two goods are different in the two countries. In England it is very hard to produce wine, and only moderately difficult to produce cloth. In Portugal both are easy to produce. Therefore while it is cheaper to produce cloth in Portugal than England, it is cheaper still for Portugal to produce excess wine, and trade that for English cloth. Conversely England benefits from this trade because its cost for producing cloth has not changed but it can now get wine at a lower price, closer to the cost of cloth. The conclusion drawn is that each country can gain by specializing in the good where it has comparative advantage, and trading that good for the other.Economies of scalerefers to the cost advantages that an enterprise obtains due to expansion. There are factors that cause a producers average cost per unit to fall as the scale of output is increased. Economies of scale is a long run concept and refers to reductions in unit cost as the size of a facility and the usage levels of other inputs increase.[4]Economies of scale is also a justification for economic integration, since some economies of scale may require a larger market than is possible within a particular country for example, it would not be efficient forLiechtensteinto have its own car maker, if they would only sell to their local market. A lone car maker may be profitable, however, if they export cars to global markets in addition to selling to the local market.Besides these economic reasons, the primary reasons why economic integration has been pursued in practise are largely political. TheZollvereinor German Customs Union of 1867 paved the way forGerman (partial) unificationunder Prussian leadership in 1871."Imperial free trade"was (unsuccessfully) proposed in the late 19th century to strengthen the loosening ties within British Empire. TheEuropean Economic Communitywas created to integrate France and Germany's economies to the point that they would find it impossible to go to war with each other.

STAGESThe degree of economic integration can be categorized into seven stages:[5]1. Preferential trading area2. Free trade area3. Customs union4. Common market5. Economic union6. Economic and monetary union7. Complete economic integration

Preferential trading areaApreferential trade area(alsopreferential trade agreement,PTA) is atrading blocthat gives preferential access to certain products from the participating countries. This is done by reducingtariffsbut not by abolishing them completely. A PTA can be established through atrade pact. It is the first stage ofeconomic integration. The line between a PTA and afree trade area(FTA) may be blurred, as almost any PTA has a main goal of becoming a FTA in accordance with theGeneral Agreement on Tariffs and Trade.

Free trade areaAfree-trade areais the region encompassing atrade blocwhose member countries have signed afree tradeagreement(FTA). Such agreements involve cooperation between at least two countries to reduce trade barriersimport quotasandtariffs and to increase trade ofgoodsand services with each other.[1]If people are also free to move between the countries, in addition to FTA, it would also be considered anopen border. It can be considered the second stage ofeconomic integration.

Customs unionAcustoms unionis a type oftrade blocwhich is composed of afree trade areawith acommon external tariff. The participant countries set up commonexternal tradepolicy, but in some cases they use differentimport quotas. Commoncompetition policyis also helpful to avoidcompetitiondeficiency.[1]Purposes for establishing a customs union normally include increasingeconomic efficiencyand establishing closer political and cultural ties between the member countries.It is the third stage ofeconomic integration.

Common marketAcommon marketis usually referred to as the first stage towards the creation of a single market. It usually is built upon a free trade area with relatively free movement of capital and of services, but not so advanced in reduction of the rest of thetrade barriers.

Economic unionAneconomic unionis a type oftrade blocwhich is composed of acommon marketwith acustoms union. The participant countries have both common policies on product regulation,freedom of movementofgoods,servicesand thefactors of production(capitalandlabour) and a commonexternal tradepolicy. When aneconomic unioninvolves unifying currency it becomes aeconomic and monetary union.

Economic and monetary unionAneconomic and monetary unionis a type oftrade blocwhich is composed of aneconomic union(common marketandcustoms union) with amonetary union. It is to be distinguished from a meremonetary union(e.g. theLatin Monetary Unionin the 19th century), which does not involve a common market. This is the sixth stage ofeconomic integration. EMU is established through a currency-relatedtrade pact. An intermediate step between pure EMU and acomplete economic integrationis thefiscal union.

Complete economic integrationComplete economic integrationis the final stage ofeconomic integration. After complete economic integration, the integrated units have no or negligible control of economic policy, including fullmonetaryunion and complete or near-completefiscal policyharmonisation.Complete economic integration is most common withincountries, rather than withinsupranationalinstitutions. An example of this are the original thirteen colonies of theUnited States of America, which can be viewed as a series of highly integrated quasi-autonomous nation states. In this example it is true that complete economic integration results in afederalistsystem of governance as it requires political union to function as, in effect, a single economy.

Economic TheoryThe framework of the theory of economic integration was laid out byJacob Viner(1950) who defined thetrade creationandtrade diversioneffects, the terms introduced for the change of interregional flow of goods caused by changes in customs tariffs due to the creation of an economic union. He considered trade flows between two states prior and after their unification, and compared them with the rest of the world. His findings became and still are the foundation of the theory of economic integration. The next attempts to enlarge the static analysis towards three states+world (Lipsey, et al.) were not as successful.The basics of the theory were summarized by theHungarianeconomistBla Balassain the 1960s. As economic integration increases, the barriers of trade between markets diminish. Balassa believed that supranational common markets, with their free movement of economic factors across national borders, naturally generate demand for further integration, not only economically (via monetary unions) but also politicallyand, thus, that economic communities naturally evolve into political unions over time.The dynamic part of international economic integration theory, such as the dynamics oftrade creationandtrade diversioneffects, thePareto efficiencyof factors (labor, capital) and value added, mathematically was introduced by Ravshanbek Dalimov. This provided an interdisciplinary approach to the previously static theory of international economic integration, showing what effects take place due to economic integration, as well as enabling the results of the non-linear sciences to be applied to the dynamics of international economic integration.Equations describing:1. enforced oscillations of a pendulum with friction;2. predator-prey oscillations;3. heat and/or gas spatial dynamics (theheat equationandNavier-Stokes equations)were successfully applied towards:1. the dynamics of GDP;2. price-output dynamics and the dynamic matrix of the outputs of an economy;3. regional and inter-regional migration of labor income and value added, and to trade creation and trade diversion effects (inter-regional output flows).The straightforward conclusion from the findings is that one may use the accumulated knowledge of the exact and natural sciences (physics, biodynamics, and chemical kinetics) and apply them towards the analysis and forecasting of economic dynamics.Dynamic analysis has started with a new definition ofgross domestic product(GDP), as a difference between aggregate revenues of sectors and investment (a modification of the value added definition of the GDP). It was possible to analytically prove that all the states gain from economic unification, with larger states receiving less growth of GDP and productivity, and vice versa concerning the benefit to lesser states. Although this fact has been empirically known for decades, now it was also shown as being mathematically correct.A qualitative finding of the dynamic method is the similarity of a coherence policy of economic integration and a mixture of previously separate liquids in a retort: they finally get one colour and become one liquid. Economic space (tax, insurance and financial policies, customs tariffs, etc.) all finally become the same along with the stages of economic integration.Another important finding is a direct link between the dynamics of macro- and micro-economic parameters such as the evolution of industrial clusters and the GDP's temporal and spatial dynamics. Specifically, the dynamic approach analytically described the main features of the theory of competition summarized byMichael Porter, stating that industrial clusters evolve from initial entities gradually expanding within their geographic proximity. It was analytically found that the geographic expansion of industrial clusters goes along with raising their productivity and technological innovation.Domestic savings rates of the member states were observed to strive to one magnitude, and the dynamic method of forecasting this phenomenon has also been developed. Overall dynamic picture of economic integration has been found to look quite similar to unification of previously separate basins after opening intraboundary sluices, where instead of water the value added (revenues) of entities of member states interact.

Success factorAmong the requirements for successful development of economic integration are "permanency" in its evolution (a gradual expansion and over time a higher degree of economic/political unification); "a formula for sharing joint revenues" (customs duties, licensing etc.) between member states (e.g., per capita); "a process for adopting decisions" both economically and politically; and "a will to make concessions" between developed and developing states of the union.A "coherence" policy is a must for the permanent development of economic unions, being also a property of the economic integration process. Historically the success of theEuropean Coal and Steel Communityopened a way for the formation of theEuropean Economic Community(EEC) which involved much more than just the two sectors in the ECSC. So a coherence policy was implemented to use a different speed of economic unification (coherence) applied both to economic sectors and economic policies. Implementation of the coherence principle in adjusting economic policies in the member states of economic block causeseconomic integration effects.

Obstacles to economic integrationObstacles standing as barriers for the development of economic integration include the desire for preservation of the control of tax revenues and licensing by local powers, sometimes requiring decades to pass under the control of supranational bodies. The experience of 1990-2009 has shown radical change in this pattern, as the world has observed the economic success of the European Union. So now no state disputes the benefits of economic integration: the only question is when and how it happens, what exact benefits it may bring to a state, and what kind of negative effects may take place.[citation needed]

Global economic integrationWith economics crisis started in 2008 the global economy has started to realize quite a few initiatives on regional level.It is unification between the EU and US, expansion of Eurasian Economic Community (now Eurasia Economic Union) by Armenia and Kirgyzstan. It is also the creation of BRICS with the bank of its members, and notably high motivation of creating competitive economic structures within Shanghai Organization, also creating the bank with many multi-currency instruments applied. Engine for such fast and dramatic changes was insufficiency of global capital, while one has to mention obvious large political discrepancies witnessed in 2014-2015. Global economy has to overcome this by easing the moves of capital and labor, while this is impossible unless the states will find common point of views in resolving cultural and politic differences which pushed it so far as of now.

Financial integrationFinancial integrationis a phenomenon in which financialmarketsin neighboring, regional and/orglobal economiesare closely linked together. Various forms of actual financial integration include:Information sharingamong financial institutions; sharing of best practices amongfinancial institutions; sharing of cutting edgetechnologies(throughlicensing) amongfinancial institutions;firmsborrow and raise funds directly in the internationalcapital markets;investorsdirectly invest in the internationalcapital markets; newly engineeredfinancial productsare domestically innovated and originated then sold and bought in the international capital markets; rapid adaption/copycat of newly engineeredfinancial productsamongfinancial institutionsin different economies; cross-bordercapital flows; and foreign participation in the domesticfinancial markets.Because of financialmarket imperfections, financial integration in neighboring, regional and/orglobal economiesis therefore imperfect. For example, the imperfect financial integration can stem from the inequality of themarginal rate of substitutionsof differentagents. In addition to financialmarket imperfections,legal restrictionscan also hinder financial integration. Therefore, financial integration can also be achieved from the elimination of restrictions pertaining to cross-border financial operations to allow (a) financial institutions to operate freely, (b) permit businesses to directly raise funds or borrow and (c) equity and bond investors to invest across the state line with fewer [or without imposing any] restrictions.[1]However, it is important to note that many of thelegal restrictionsexist because of themarket imperfectionsthat hinder financial integration.Legal restrictionsare sometimes second-best devices for dealing with themarket imperfectionsthat limit financial integration. Consequently, removing thelegal restrictionscan make theworld economybecome worse off. In addition, financial integration of neighboring, regional and/or global economies can take place through a formal international treaty which the governing bodies of these economies agree to cooperate to address regional and/or global financial disturbances through regulatory and policy responses.[1]The extent to which financial integration is measured includes gross capital flows, stocks of foreign assets and liabilities, degree of co-movement of stock returns, degree of dispersion of world-wide real interest rates, and financial openness.

Advantages Of Economic IntegrationTrade Creation: Member countries have (a) wider selection of goods and services not previously available; (b) acquire goods and services at a lower cost after trade barriers due to lowered tariffs or removal of tariffs (c) encourage more trade between member countries the balance of money spend from cheaper goods and services, can be used to buy more products and services

Greater Consensus:Unlike WTO with hugh membership (147 countries), easier to gain consensus amongst small memberships in regional integration

Political Cooperation:A group of nation can have significantly greater political influence than each nation would have individually. This integration is an essential strategy to address the effects of conflicts and political instability that may affect the region. Useful tool to handle the social and economic challenges associated with globalization

Employment Opportunities:As economic integration encourage trade liberation and lead to market expansion, more investment into the country and greater diffusion of technology, it create more employment opportunities for people to move from one country to another to find jobs or to earn higher pay. For example, industries requiring mostly unskilled labor tends to shift production to low wage countries within a regional cooperation

Disadvantages Of Economic IntegrationCreation Of Trading Blocs: It can also increase trade barriers against non-member countries.

Trade Diversion: Because of trade barriers, trade is diverted from a non-member country to a member country despite the inefficiency in cost. For example, a country has to stop trading with a low cost manufacture in a non-member country and trade with a manufacturer in a member country which has a higher cost.

National Sovereignty: Requires member countries to give up some degree of control over key policies like trade, monetary and fiscal policies. The higher the level of integration, the greater the degree of controls that needs to be given up particularly in the case of a political union economic integration which requires nations to give up a high degree of sovereignty