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What economic benefits might countries gain from forming a common market?

      

What economic benefits might countries gain from forming a common market?

  

Answers

Kavungya
The most obvious benefits which countries might gain from forming a common market are
associated with free trade between them. The benefits of free trade are illustrated by the law of
comparative advantage which states that countries should specialize in producing those goods
where they have a comparative advantage. Specialization, together with free trade, will result in
an increase in total output and all countries will be able, to a great or lesser extent, to share in
the benefits.

In particular, different countries have different factor endowments and, as the international
mobility of these factors tends to be severely limited, trade increases the range of goods and
services available in a particular country. By becoming part of a common market, imports
from other member countries are available more cheaply and easily. Imports of certain raw
materials or types of capital equipment not otherwise available in a particular country will
improve its productive potential, enabling a faster rate of economic growth to be achieved.
Similarly, improvements in the range and quality of consumer goods available will tend to
enhance a country's standard of living.

In addition, there is a larger market for domestic output and firms may be able to benefit from
economies of scale by engaging in export activities. Economies of scale improve efficiency in
the use of resources and enable output to be produced at lower cost. This also raises the
possibility of benefits to consumers if these cost savings are passed on in the form of lower
prices. In addition, the extension of the market in which firms operate increases the amount of
competition they face and hence should improve efficiency.

Establishment of a common market is often accompanied by some form of exchange rate
agreement between members and this in turn is likely to encourage further trade as it reduces
uncertainty for both exporters and importers. Stability of exchange rates is also beneficial to a
government in formulating its domestic economic policies.

Membership of a common market may be particularly beneficial to smaller or weaker
economies, as in addition to increasing the availability of essential factors of production and the
range of goods and services available to domestic consumers, it also enables them to benefit
from any economic growth experienced by their fellow members. Spin-offs may be in the
form of larger markets for their exports, lower import prices, improved employment
opportunities and so on.In addition to fostering economic ties between countries, common
markets provide the basis for stronger political links. Again, this may be particularly important
for smaller countries enabling them to benefit from an enhanced position in the world
economy. It may also encourage further international economic co-operation, in turn
providing an additional stimulus to growth.
Kavungya answered the question on April 15, 2021 at 07:50

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