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DA1. European Union

Statement

By 1993, nations in the European Union (EU) had eliminated all barriers to the flow of goods, services, labour, and capital across their borders. Even such things as consumer protection laws and the types of plugs required to plug in appliances have been standardized to ensure that there will be no barriers to trade. How do you think this elimination of trade barriers affected EU output?

Answer

Introduction

The European Union (EU) is a political and economic entity that organizes the relationship between its 27 member states in a unified manner that is somehow similar to the United States of America. The EU was created to promote peace, stability, and prosperity in Europe and reached a GDP of $15.49 trillion in 2021 (Hayes, 2023).

This text will discuss European economic before the union, the changes that EU brought to the economy of the continent, and the consequences of these changes on the output of the EU.

Europe before the union

There were several attempts to unify European economies after World War II; such as the European Coal and Steel Community (ECSC) in 1951, and the European Economic Community (EEC) in 1957 which meant for removing barriers to the movement of goods and services, removing policies that inhibit market competition, creating a common agricultural policy, and a common external trade policy (Gabel, 2024).

These attempts were limited in their results as it clashed with the national laws and regulations of each state, lack of a common currency, and lack in sharing economic information that would help in making economic decisions.

The European Union

In 1993, the EU was created to remove all barriers to the flow of goods, services, labor, and capital across the borders of its member states. This allowed for the creation of a single market and a common currency, the Euro, which is used by 20 of its member states (Hayes, 2023).

The EU also created central institutions that organizes inter and intra-state relations within the union, such as the European Parliament, the European Council, the European Commission, and the Court of Justice of the European Union. The European Central Bank and the European Court of Auditors are the most important financial institutions of the EU.

Economic impact of the EU

The common institutions and removing the trade barriers allowed for states to specialize in the production of goods and services that they have a comparative advantage in, and trade with other states which means that is more efficient in production while lowering the opportunity cost of production.

Countries in the north like Germany are more specialized in high-valued goods like cars and machinery while countries in the south like Spain are more specialized in low-valued goods like agriculture and textile. Italy is specialized in high quality clothing while Portugal is specialized in cheaper clothing. France is specialized in high-quality wine while Spain is specialized in cheaper wine (Rittenberg & Tregarthen, 2009).

This specialization allowed for the EU to increase its output and GDP as the market for highly specialized goods is wider than the market of the country alone. The coordination of the economic institutions allowed for better allocation of resources to areas where the EU as a whole has a comparative advantage in.

Every country benefited from the gain in human capital due to the free movement of labor and easier collaboration between universities and research centers. The free capital movement and investment allowed for more innovation and technological advancement.

On the other hand, the EU market dynamics increased the competition between companies as they had to compete with firms from other countries; but this had an overall positive impact on the end consumer as it lowered the prices of goods and services and increased their quality.

Conclusion

The cost-benefit analysis of elimination of trade barriers shows that it had affected EU output in a positive way as it boosted the overall growth and increased efficiency making the EU economy operating closer to the line of production possibilities frontier.

References