The impact of integration on a small economy: The case of Paraguay in Mercosur

This thesis examines how Paraguay's membership in Mercosur will affect Paraguay's economic development. For the research methodology, I analyze the welfare and efficiency consequences of integration, which can be divided into three components: static efficiency gains (the long-term real income consequences), dynamic and efficiency gains, and terms of trade effects. The effects of trade creation and trade diversion are also considered. The results suggest that Paraguay is likely to benefit from Mercosur. Estimates show small but positive gains in static welfare, achieving economies of scale and price rationalization, improved terms of trade, and trade creation. Although the conditions for realizing gains from a free trade area are somewhat strict, Paraguay in general seems to satisfy these conditions. This suggests that we can be cautiously optimistic about the future effects on Paraguay of its continued membership in Mercosur.