Monetary union benefits
Monetary union-free trade between members no barriers, common
external tariff anyone outside group must pay tariff to sell goods into
those countries, free movement of labour and capital, share a common
currency.
1 trade creation-trade with same currency as main trading partners never
need to worry about unfavourable exchange rates negatively effecting
profit margins. Gives firms more confidence investment goes up. Tap into
comparative advantage.
2 likely to result in higher levels of FDI- Ireland- googles UK headquarters.
Firms want to avoid paying the tariff, so they set up a factory or
headquarters within the Eurozone – now when you sell with other
members of the eurozone you don’t pay the tariff. FDI-AD shift outwards-
multiplier.
EV
Loss of monetary independence- must set an interest rate that works for
all members- whilst German economy was booming the Greek economy
was in a deep recession- Germany need high interest rates but Greece
needs a low interest rate to stimulate growth- cannot meet both country’s
needs.
Countries may become too interdependent on one another- if one
country in the trading bloc mismanages their economy it effects all the
members- Greece debt crisis escalate so much that they needed to be
bailed out on several occasions by eurozone countries-Germany
contributed £56 billion euros to Greek bailouts. France contributed £42
billion.
Effects of growth of trading blocs on global trading patterns (25)
Global trading patterns-where trade is going to be focused.
1 the growth of trading blocs such as the EU is likely to have resulted in
high levels of trade diversion. Trade diversion is where trade is diverted
away from more efficient countries outside of a bloc to less efficient
countries within a bloc. Goods coming in from abroad more expensive
due to tariff. So, start trading with members more.
EV
Even with common external tariff countries may still have a comparative
advantage-have to continue to import from countries outside bloc.
, 2 massive volumes of trade within bloc trade creation. Lower barriers if
same currency more confidence.
EV
How good and effective depends on how many countries are in the bloc.
Exchange rates
High inflation
results in less demand for the countries goods and therefore less demand
for the currency- the value of the currency will depreciate.
Increased demand for goods from abroad- sell the pound and buy Euros
increased supply of the pound- value of the pound depreciates.
If high interest rate will revalue lira as more people will demand the lira as
they can get more reward for saving.
If low interest rate they will sell the lira and buy other currency as there is
no great reward for saving in turkey.
Two factors that may have caused a depreciation
Increased domestic income-demand more imports increased supply of
currency
High inflation-less price competitive demand for exports goes down
demand for the currnecy goes down causing a fall in demand of currency
EV
Monetary union-free trade between members no barriers, common
external tariff anyone outside group must pay tariff to sell goods into
those countries, free movement of labour and capital, share a common
currency.
1 trade creation-trade with same currency as main trading partners never
need to worry about unfavourable exchange rates negatively effecting
profit margins. Gives firms more confidence investment goes up. Tap into
comparative advantage.
2 likely to result in higher levels of FDI- Ireland- googles UK headquarters.
Firms want to avoid paying the tariff, so they set up a factory or
headquarters within the Eurozone – now when you sell with other
members of the eurozone you don’t pay the tariff. FDI-AD shift outwards-
multiplier.
EV
Loss of monetary independence- must set an interest rate that works for
all members- whilst German economy was booming the Greek economy
was in a deep recession- Germany need high interest rates but Greece
needs a low interest rate to stimulate growth- cannot meet both country’s
needs.
Countries may become too interdependent on one another- if one
country in the trading bloc mismanages their economy it effects all the
members- Greece debt crisis escalate so much that they needed to be
bailed out on several occasions by eurozone countries-Germany
contributed £56 billion euros to Greek bailouts. France contributed £42
billion.
Effects of growth of trading blocs on global trading patterns (25)
Global trading patterns-where trade is going to be focused.
1 the growth of trading blocs such as the EU is likely to have resulted in
high levels of trade diversion. Trade diversion is where trade is diverted
away from more efficient countries outside of a bloc to less efficient
countries within a bloc. Goods coming in from abroad more expensive
due to tariff. So, start trading with members more.
EV
Even with common external tariff countries may still have a comparative
advantage-have to continue to import from countries outside bloc.
, 2 massive volumes of trade within bloc trade creation. Lower barriers if
same currency more confidence.
EV
How good and effective depends on how many countries are in the bloc.
Exchange rates
High inflation
results in less demand for the countries goods and therefore less demand
for the currency- the value of the currency will depreciate.
Increased demand for goods from abroad- sell the pound and buy Euros
increased supply of the pound- value of the pound depreciates.
If high interest rate will revalue lira as more people will demand the lira as
they can get more reward for saving.
If low interest rate they will sell the lira and buy other currency as there is
no great reward for saving in turkey.
Two factors that may have caused a depreciation
Increased domestic income-demand more imports increased supply of
currency
High inflation-less price competitive demand for exports goes down
demand for the currnecy goes down causing a fall in demand of currency
EV
