Economics of the Single Market
1. Free Trade in Goods: Businesses can sell their products anywhere in
the EU’s member states and consumers can buy where they want with no
penalty.
2. Mobility of Labour: Citizens of EU member states can live and work in
any other country. The aim is to improve the mobility of labour.
3. Free Movement of Capital: Currencies and capital can flow freely
between member states and EU citizens can use financial services in any
member state.
4. Free Trade in Services: Professional services such as pensions,
architecture, telecommunications and advertising can be offered in any
member state.
Single market and economic concepts
1. EU Single Market is a “positive sum game” for member states if
trade and competition enhances productivity and reduces costs and prices
2. Lower prices should boost consumers’ real living standards and an
increase in competition will lead to improved allocative efficiency /
less X inefficiency
3. The size of EU single market allows businesses to exploit economies
of scale and scope leading to improvements in productive efficiency.
4. Economic and social costs and benefits from a freer movement of labour
5. Competition should lead to a degree of price convergence between
countries – but there will always be price variations within EU for the
same products!
6. Encourages cross-border technological alliances – a boost to dynamic efficiency?
7. Strong internal EU economy may be less vulnerable to global external shocks?
Foreign direct investment (FDI) – both within the EU and into/out of EU
Consider the main motivations for foreign direct investment
• Resource seeking – where a business seeks specific resources which are unavailable in the home country
• Efficiency seeking – e.g. businesses seeking to benefit from a more
productive workforce, lower wages or from the external economies of
scale available in a region.
• Market seeking – e.g. investment to take commercial advantage of growing demand in faster-growing emerging market countries
Vertical FDI is where a company separates / outsources production
across a number of locations depending on where unit costs are lowest.
For example, Nokia produces mobile phone components and batteries in
Hungary and assembles phones in Germany and Finland, where it also has
research and development facilities.
Horizontal FDI is where a company locates the same production process
in a number of different locations, for example car manufacturers which
invest in several European countries.
(Source: Tutor2u)
