A theory of economic unions

Abstract

After decades of successful growth, economic unions have recently become the focus of heightened political controversy. To understand why, we develop a theoretical model of the effects on trade, income distribution and welfare of economic unions that differ in size and scope. Our model shows that political support for international unions can grow with their breadth and depth provided member countries are sufficiently similar. However, dif- ferences in economic size and factor endowments can trigger disagreement over the value of unions. Our model is consistent with some salient features of the process of European integration and statistical evidence from survey data.