On the Extent of Economic Integration: A Comparison of E.U. Countries and U.S. States

European economic integration is commonly believed to be incomplete, and that further reforms are needed. In this context, the union of U.S. states is believed to be the benchmark model of complete economic integration and often serves as the basis for comparison as regarding the extent of E.U economic integration. Yet, with low trade barriers and with productive factors at least notionally mobile across E.U. countries, is the belief that U.S. states are more integrated than the E.U. correct? The objective of this paper is to examine the theoretical and empirical premises of such beliefs. We derive three theoretical predictions about the distribution of output and factor stocks that will arise among members of a fully integrated economic area (IEA) in which goods and factors are freely mobile and policies are harmonized. These theoretical predictions are then empirically tested using data on the output and factor stocks of 14 E.U. member states and the 51 U.S. states (includes District of Columbia)for the period from 1965 to 2000. The empirical results convincingly support each theoretical prediction and in particular indicate that, contrary to popular belief, the extent of E.U. economic integration is not statistically different from that among U.S. states.