Economic Union Definition
Economic Union is a group of countries coming together to allow the goods and services to move freely in and out of these countries to remove the trade barriers and create better employment of skills and resources. It even allows free movement of production factors such as capital investment and labor and has a common internal and external trading policy.
Objectives of Economic Union
#1 – Increase Efficiency
As the free flow of goods, services, and production factors occur, production costs reduce. This increases the profit marginsProfit MarginsProfit Margin is a metric that the management, financial analysts, & investors use to measure the profitability of a business relative to its sales. It is determined as the ratio of Generated Profit Amount to the Generated Revenue Amount. of the member countries, which leads to greater specialization and better use of resources as each country produces those goods in which it has a comparative advantage and trades all other goods so that more is produced in totality.
#2 – Consumer Satisfaction
When the free flow of goods and services occurs, and the customs duties are removed, the price of imported goods and services reduces. This leads to an increase in consumption because consumers can afford a greater quantity at the given level of income.
#3 – Higher Standards of Living
Due to the free movement of production factors, people are presented with greater employment opportunities leading to higher incomes and better utilization of skills. With higher disposable incomeDisposable IncomeDisposable income is an important mechanism to measure household incomes, and includes all sorts of income such as wages and salaries, retirement income, investment gains. In other words, it is the amount of money left after paying off all the direct taxes., people can afford a better lifestyle.
#4 – Increase Competitiveness
When the group of countries comes together to form an economic union, they give one another strength because the cost of productionCost Of ProductionProduction Cost is the total capital amount that a Company spends in producing finished goods or offering specific services. You can calculate it by adding Direct Material cost, Direct Labor Cost, & Manufacturing Overhead Cost. reduces. This makes them more competitive in the world economy and brings them greater profit.
#5 – Strengthening Diplomacy
Due to allegiance between the countries, they gain a stronghold in world diplomacy as the world’s interdependency increases to the union. In contrast, the union in itself is less dependent on the rest of the world.
Economic Union Examples
Before BrexitBrexitBrexit refers to the combination of Britain and Exit, which signifies the withdrawal or exit of Britain from the E.U. or European Union. The residents of Britain actually voted for the exit of Britain from the E.U. and these votes were split amongst the constituent nations of the UK, for asking the stay of Wales and England and exit of Northern Ireland and Scotland., the European Union was an Economic union as well as a Monetary Union. There are still a few countries within the union that did not accept the Euro as their currency, including Britain and Switzerland, which still used their own currencies. So they were part of the economic Union but not of the Monetary Union.
Another example could be the Gulf Cooperation Council or the GCC. This comprises several Arab states. This is a political as well as an economic union in the middle-east. Even though one of the objectives was to have a common currency by 2010, Oman and UAE announced their withdrawal from the same in 2006 and 2009, respectively.
The Eurasian Economic Union is also an Economic Union with a free flow of goods and services and common fiscal policiesFiscal PoliciesFiscal policy is a government policy that is used to control a country's finances and revenue, and it includes various taxes on goods, services, and individuals, i.e., revenue collection. It has an impact on spending levels, so it is referred to as monetary policy's sister policy. for industry, agriculture, and energy. Even here, the common currency’s goal is not yet met and is one of the future objectives.
- Opportunity for Development: Smaller countries that might not get the necessary resources on their own can do so being part of the Economic Union. For example, companies in a smaller or a weaker country may not gather the required funding from banks when it attempts to generate it on its own credit score. However, a guarantee from a stronger company in the union helps it in doing so, and this allows such companies to utilize its potential to a greater level.
- Speeds up Development: When weaker countries can acquire the resources more quickly, they can speed up their development and become stronger, leading to a betterment in the standard of living of the people of these countries, and this gives strength to the economy of the union as a whole.
- Unstable: As seen in the case of the European Union, after GrexitGrexitThe term Grexit is a combination of Greece or Greek with the word exit, which means an exit of Greece from the European Union. Two famous economists of Citigroup, Ebrahim Rahbari and Willem H. Buiter, introduced the term on February 6th, 2012. and Brexit, it is clear that having a common economic policy might become unstable when the debt crisis becomes overwhelming for underperforming countries. The acronym used for some such countries in the European Union is PIIGS, the full-form of Portugal, Italy, Ireland, Greece & Spain. These are considered the weakest economies of the European Union and are therefore considered a burden on the stronger economies.
- Loss of Revenue: When the countries lift the customs and trade restrictions, they lose out on the part of their revenues from taxes. The stronger economies might not be highly impacted by it, but the weaker economies are. At times, the benefits from the union might not be sufficient to cover this loss of revenue. Therefore the countries need to conduct a thorough cost-benefit analysisCost-benefit AnalysisCost-benefit analysis is the technique used by the companies to arrive at a critical decision after working out the potential returns of a particular action and considering its overall costs. Some of these models include Net Present Value, Benefit-Cost Ratio etc. before becoming a part of the union.
This has been a guide to What is Economic Union & its Definition. Here we discuss the objectives of economic union and examples along with advantages and disadvantages. You can learn more about from the following articles –