How Integrated Is The World Economy?

This paper develops a methodology to measure the degree of economic integration between nations that are members of an integrated economic area (IEA). We show that an IEA is characterized by three properties regarding the distribution of IEA member shares of total IEA output and total IEA stocks of physical and human capital. We then show that the expected distribution of member shares within a fully integrated economic area is a harmonic series, with the share distribution depending only on the number of IEA members. This property is then used to develop a composite indicator of the degree of economic integration within an IEA that indicates the distance between the theoretical and actual distribution of shares; the closer is the actual distribution to the expected distribution, the greater the degree of integration. We empirically compute our degree of integration index for US states, and alternative IEAs (e.g., EU countries, Mercosur, Bangkok Agreement, etc.) and a World comprising 64 countries.