Theory of economic integration analyzes the economic effects of economic integrations. Theory of economic integration is developed upon the welfare effects of customs union. The welfare effects of customs union are introduced by Jacop Viner in 1950. In his book The Customs Union Issue, Viner examines the static effects of customs union. Static effects are the effects that occur at the time of establishment of the customs union. Static effects of customs union are called trade creation and trade diversion. Static effects of customs union They emanate at the formation of the customs union. Thus, they represent very short run effects. The static effects of customs union take into consideration only the welfare within the highest cost country. The static effects of customs union are sometimes referred as Vinerian customs union theory. Next to the static effects, there are also dynamic effects of customs union. Dynamic effects are long run effects. They arise due to increased competition within the customs union, higher level of technology, economies of scale, induce to foreign direct investments and better allocation of economic resources. Let’s give brief information about these dynamic effects:

• Increased competition: Before the establishment of customs union, producers may enjoy the protection behind trade restrictions. Along with the establishment of customs union, trade restrictions among the member countries are abolished. Thus, producers have to be more efficient so as to compete with the identical commodities of the other member countries. Due to the increased competition, costs of production will be decreased, leading to a decrease in prices. Consumers will enjoy the lower prices that were the outcomes of increased competition.
• Higher level of technology: Increased competition will lead to seeking higher level of technology. Since producers would like to rise efficiency in order to meet the increased competition, they would demand higher level of technology within their production. Thus, customs union would stimulate the improvement and utilization of new technologies. At the end, consumers will be better off with decreased prices.
• Economies of scale: It may result from the enlarged market effect of customs union. A country entering a customs union will begin to produce for the customs union market that is larger than its domestic market. Increased amount of production will lead to economies of scale that will lower the costs and also prices. Like in the previous dynamic effects, consumers will be better off from the economies of scale.
• Induce to foreign direct investments: Enlarged market that is formed along with the customs union may attract the attention of potential investors. Investors who would like to meet the advantages of increased competition and economies of scale will invest within the customs union member countries. Increased foreign direct investments will also help the adjustment of balance of payments deficits of the member countries, if any.
• Better allocation of economic resources: In a customs union, member countries produce the commodities or services in which they have a comparative advantage. Specialization that arises from comparative advantage will lead to better allocation of economic resources. Not only the member countries but also the world will be better off with adequate allocation of limited economic resources.

As also understood from the information given, the correct answer is E. The dynamic effects of customs union are increased competition within the customs union, higher level of technology, economies of scale, induce to foreign direct investments and better allocation of economic resources.