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Effects of Trade Liberalization on Peripheral Country’s Economy: An Economic Integration Study

This study examines how Regional Integration Agreements impact national firms in peripheral countries under monopolistic competition. It explores the effects of trade liberalization on employment, income, and self-sufficiency, comparing moderate and complete reduction of trade barriers in hypothetical scenarios. The model considers two sectors and regions, emphasizing inter- and intra-regional trade in manufacturing. Simulation results analyze the implications for wages, number of firms, and labor supply in the short and long run.

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Effects of Trade Liberalization on Peripheral Country’s Economy: An Economic Integration Study

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  1. Economic integration: national firms Primary aim: The design of Regional Integration Agreements (RIAs) in case of National Firms and monopolistic competition How does trade liberalization (RIAs such as the EU) affect employment, income and self-sufficiency in a peripheral country? Trade liberalization is considered as a reduction in transportation costs (different trade barriers)

  2. One central and one peripheral region • The message : • A moderate reduction of trade barriers (negative effect on the peripheral country) • Complete elimination of trade barriers (positive effect on the peripheral country)

  3. Hypothetical effects of lowering trade barriers

  4. Model: Two sectors (one perfectly and one imperfectly competitive) and two regions (i and j) Inter- and intra-regionaltrade in imperfectlycompetitivesector (manufacturing) X(ij) i X(jj) j X(ii) X(ji)

  5. Model: Pij = a – 1/sj {(1 +θ )Xij/2 + θ[(ni – 1)Xij + nj Xjj ]} Pii = b– 1/si {(1 +θ )Xii/2 + θ[(ni – 1)Xii + nj Xji ]} Πi = (Pii – ci)Xii + (Pij – ci - t)Xij – fi

  6. Overview of the simulations • Wages equal and fixed in both countries: fixed AVC • Short run The number of firms fixed in the countries • Long run The number of firms varies in the countries • Upward sloping supply curve for labour: variable AVC

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