European Integration: Some stylised facts

The illustrated remarkable increase of trade intensities between the Member
States has at the macroeconomic level strengthened the spillovers of aggregate
demand. At the microeconomic level the increased mobility of goods and
services tends to equalise the individual prices for goods and services.
However, the effect of trade liberalisation on price differences varies a great
deal from one item of goods to the other. More precisely, the decrease in price
dispersion depends on the size of transport and other trade costs after the
elimination of tariffs and quotas. For those tradeables, where trade costs are low
after liberalisation, the price dispersion is similarly low. For non-tradeables, on
the other hand, trade costs after liberalisation are significant and, as a
consequence, the markets are segmented. In this case, the formation of the
customs union and the Internal Market has only reduced price dispersion to a
limited degree. The distinction between tradeables and non-tradeables applies to
both goods and services. Figure 3 illustrates the development in the price
dispersion between the Member States for private final consumption from 1985
to 1998. The figure show a clear decrease of price dispersion during the years
where The Internal Market was established as price dispersion was reduced
from about 22-23% in 1985 to about 16% in 1998.¹

Figure 3. Price dispersion among Member States, 1985-98

Note: The figure shows the coefficient of variance for prices of consumer goods
between Member States. The coefficient of variance is defined by the spread
divided by the mean in the statistical distribution of prices for consumer
goods. Prices include taxes (excise duties and value-added tax).

Source: EU Commission (2000).

1 Also to the extent that taxes in the future are becoming more harmonised within the Union this
should further narrow down the spread in prices.

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