The determination of net welfare gains or losses resulting from economic integration depends strongly on changes in tariffs that lead to price changes and changes in patterns of trade. Therefore, much of this study was to examine and assess the effects which the discriminatory removal (or reduction) of tariffs within the Central American Common Market would have on production, consumption, and trade and to determine the prices (tariffs inclusive) which caused a shift in trade from the rest of the world, to a growth in trade among partners.

A policy implication of this study for Less Developed Countries (LDCs) is that overcoming the development constraints of small size markets by economic integration tends to result in a net improvement in welfare.

The results of this study suggest that integration did have a net positive effect on the welfare for the entire region (that is, the CACM) and to each of the members of the CACM. In the short run, Panama experienced a loss in trade with the partners of the CACM, and this loss manifested itself in a number of workers rendered unemployed in Panama.

Several techniques (income elasticities, and regression analysis) were used to search for the presence of trade creation or trade diversion, and to measure and compute the value of gains and losses from economic integration. Because Panama has been a trading country with the members of the Central American Common Market, the same techniques used to measure the net trade effect of integration among the CACM members were also used to measure the effects of integration on Panama. The trade diversion (and welfare loss) that Panama experienced was translated into the number of workers displaced and the cost of the displaced workers.

The purpose of the study is to analyze the effects of economic integration on Central America and Panama.