Question

discuss the welfare effects of trade integration assuming that consumers value being able to consume a larger number of varieties.

Answer 1

When prices among different locations or related goods follow similar patterns over a long period of time is called as Market integration. Trade integration leads to formation of common markets and economic unions and federation. Trade integration establishes free trade between number of countries the aim is to securing the benefits of international specialization and international trade. Due to trade integration consumers are able to consume a larger number of varieties. Due to trade integration supply occurs from a more-efficient producer from various country helps to raise a country’s national welfare. Countries specialize in the products are more efficient, so total production will be higher and consumers value being able to consume a larger number of varieties. Welfare effects of trade integration are a reduction in the home bias in consumption, increases the degree of international competition in goods markets, reduce in real exchange rate volatility. Trade integration leads to lower prices for distributors and consumers, increase the level of welfare and increase of economic productivity of the states. Trade integration leads to larger and fully integrated goods markets increases the number of product varieties available to consumers.