Economic Union Definition Objectives Examples

Economic Union Definition

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Objectives of Economic Union

#1 – Increase Efficiency

Production costs reduce as the free flow of goods, services, and production factors occur. It 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. read more 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. It increases in consumption because consumers can afford a greater quantity at the given income level.

#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.read more, 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 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. read more reduce. It makes them more competitive in the world economy and more profit.

#5 – Strengthening Diplomacy

Due to allegiance between the countries, they gain a stronghold in world diplomacy as their interdependence increases to the union. In contrast, the union 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.read more, the European Union was an Economic Union and a Monetary Union. A few countries within the union still did not accept the Euro as their currency, including Britain and Switzerland, which still used their 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. It comprises several Arab states and is a political and 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 in 2006 and 2009, respectively.

The Eurasian Economic Union is also a free flow of goods and services and common fiscal policiesFiscal PoliciesFiscal policy refers to government measures utilizing tax revenue and expenditure as a tool to attain economic objectives. read more for industry, agriculture, and energy. Even here, the common currency’s goal is not yet met and is one of the future objectives.

Benefits

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 their credit score. However, a guarantee from a stronger company in the union helps it do so, allowing such companies to utilize their 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, which gives strength to the economy of the union as a whole.

Disadvantages

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.read more 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, 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 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.read more before becoming a part of the union.