All countries in the modern world do not follow a uniform discriminatory trade policy several forms of economic integration have come into existence such as removal of trade barriers (especially tariffs) among certain countries and discrimination against others. The most important forms of such international economic integration are (i) free tide areas, (ii) customs unions and (iii) common markets.
A free trade area refers to the group of countries which have abolished all tariff barriers amongst themselves but each individual country is free to maintain any level of tariff against other countries.
A customer union is an agreement between members of a group of nations to abolish all custom duties (tariffs) levied in trade amongst them at the same time establishing common tariffs agent imports from the non member countries. It is thus also referred to as the external tariff. A notable difference between a customs union and a free trade area is that in the former there is a common structure of custom duties adopted by all the member countries while trading with non member countries, in the latter case however the members follow different discriminatory individual tariff schedules against non member countries.
Further a customs union may be either limited or it may be complete. A limited customs union may involve only one commodity or a few commodities at the most while a complete union consists of the abolition of all restrictions on the movement goods and factors of production as well as the adoption of commonly integrated fiscal and monetary policies such a complete union is known as an economic union.
The formation of a common market however implies a highest degree of interdependence amongst the member countries. Under the common market economic integration permits not only the free movement of goods among member countries, but all the factors of production too can move freely.
Economists have however focused their attention on the institution of customs union, the analysis of which is supposed to be easily extendible to the case of free trade areas and common markets and programming solutions. Following the tradition we too will take up here only the customs union in its general form so as to equip ourselves with an analytical framework which can be used in dealing with any specific case assignment help.