Definition
where trade is happening across borders (physical, geographical, etc)
Factors
- Movement of X becomes more free
- availability and demand of goods - more absolute supply/demand = better integration
- production costs differ in different places - more difference = better integration
- transaction & transport costs - lower = better integration
- financial risk & Opportunity Cost - lower = better integration
Measure
- trade amount / ratio of GDP
- amount of Movement of X
- similarity of prices in different places → Law of One Price
- at least prices move together → “weak law of one price”
Model
- with 0 transport cost … Arbitrage
Historic for Normal Goods (Wheat)
- ratio of US / UK wheat price
-
1 … US > UK
- < 1 … UK > US
- = 1 … about same
-
- with rising integration ratio approaches 1
Ratio
Absolute Prices
Absolute Trade
- left scaled appropriately
- UK imported US wheat
Price Ratios 1806-1913
- higher market integration than before
Comparison to Special goods (Pepper)
- special goods are not converging as fast as normal goods
