The West Bank and Gaza Strip were occupied by Israel in the Six Day War of 1967. Initially, Israel called for an exchange of these territories in return for peace. This was rejected by the Arab states, hardening the Israeli position. A process of creeping annexation began which twenty years later has transformed Israel into a de facto binational state. Nowhere has this transformation been more visible than in the realm of economic realities. Yet the debate about the scope, permanence and the degree of reversability of the binational economy has never been settled. Part of the confusion stems from the fact that both proponents and opponents of annexation have used economic arguments to bolster their case. Yet there also exists a general theoretical problem of identifying the characteristics of a binational economy and defining the ways in which such a construct differs from other forms of economic integration. While there is no formal definition of a binational economy in the literature for the purpose of this chapter, we must formalize this concept.