• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Assume that the UK joins a monetary union with a single European currency... Examine the likely economic effects of this on : The UK s pattern of trade.

Extracts from this document...

Introduction

Daniel Evans Assume that the UK joins a monetary union with a single European currency... Examine the likely economic effects of this on : (a) The UK s pattern of trade. At the moment, different currencies act as barriers to trade to member countries. Joining the single currency would get rid of uncertainty associated with fluctuating exchange rates and eliminate transaction costs. For example, firms would not have to incur the costs of changing money, therefore increasing income, output and employment. Britain's economic cycle tends to be 'out of sync' with the rest of Europe. UK interest rates stand at the moment at around 4.5%, but in 'Euroland' the figure is closer to 2.5%. Therefore if the UK were to join, it would have to drastically cut its interest rates. This of course would result in an inflationary boom as people will borrow and spend more, increasing the price level by shifting the AD curve to the right. This will result in UK exports being relatively less competitive than in Europe, and so reduce the demand for them, ultimately also resulting in structural unemployment. ...read more.

Middle

Firms will therefore find it very difficult to segment the market and charge the desired higher price. We've already mentioned that entering a single currency will further lower barriers to entry, and this will also increase competition within the EU. Domestic firms will be under pressure to cut costs and so produce more efficiently then before, further benefiting the consumer in the form of price cuts. There would be mixed opinions about the Single Currency among firms. In the short run, there would be massive menu costs. But this would be a one-off cost to firms, and so is myopic and superfluous. However, firms can only achieve full Economies of Scale once different currencies are abolished, and firms are happy to expand into Europe without the fear of exchange rate fluctuations. Economies of Scale are an example of dynamic gains of being apart of the common market. The absence of barriers should also result in information being exploited faster, and perhaps benefit firms in the form of more R & D, and so higher productivity. ...read more.

Conclusion

For low inflation, again the UK is fairing well in comparison to other European countries, however, joining the Single Currency wouldn't change that too much as the German style anti-inflationary bias of the ECB is likely to result in low inflation anyway. In terms of Economic Growth, the UK could benefit. Firms are generally in favour of the move towards the Euro, as they will be able to exploit full Economies of Scale, and produce at a lower unit cost, therefore maximising revenues. With firms retaining higher profits, they may give wage increases, and so increase the amount workers have to spend, or firms may decide to spend their revenue on R & D, or increase investment. Either way, there is an increase in aggregate demand in the economy, and so economic growth could well take place. Joining the Euro will make UK goods more competitive as they will have decreased in value, and so demand for exports may well increase, so too will the demand for imports decrease, as they have become relatively less competitive. Therefore the balance on the current account will improve. But with lower interest rates, fewer firms will be encouraged to invest in UK financial businesses, and so the capital account balance will probably worsen. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our GCSE Economy & Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related GCSE Economy & Economics essays

  1. UK Membership of the European Monetary Union.

    o Efficiency Gains: the case FOR * Dynamic gains will be made from capital investment in tooling up for the larger market. This market widening and deepening will improve growth. * Gerrymandering by politicians will be unlikely. Minus balances have led to interest rate rises to maintain the exchange rate.

  2. The Quest for Optimal Asset Allocation Strategies in Integrating Europe.

    conclusions reached are most probably the result of the different data sources employed. Where Ehling and Ramos use DataStream indices (starting from January 1988 till December 2001), Moerman makes use of MSCI indices (starting from January 1995 till October 2002).

  1. Free essay

    From an economic perspective should my council do more to recycle a greater proportion ...

    Recycling means less landfill sites will be made. This means the land that would have been used as a landfill, can be used in better ways. This is because landfill sites that are not used, as a result of recycling, have large opportunity costs.

  2. Economics in a European Context Coursework - Monetary Union

    Eliminating the costs of having to convert currencies would immediately solve these problems. Another problem relating to the exchange rate costs is exchange rate uncertainty. When trading with different currencies firms never know which way the exchange rate will move.

  1. THE UK AND THE EURO

    However, by staying out, UK will have more independence and will be able to follow a more national policy. In addition, she will be recognised as a major world player with more influence abroad. Will UK be better or worse off by joining the Euro: This debate is like the two sides of a coin.

  2. Spain's Transition to the European Union

    that modernization through greater integration with the EU offered perhaps the only realistic policy option. Adolfo Suarez, the first post-Franco Prime Minister, began to implement political reforms. Parliamentary elections were held in June 1977 and a new constitution was adopted in 1978.

  1. What effects have interest rates had on economic indicators like GDP, Inflation ,Unemployment and ...

    The effects of the interest rate rise from 1999 - 2000 was not felt until 2001- 2002 where GDP decreased. This relationship relates directly to the theory that as interest rates increase then GDP decreases. And if interest rates decrease then GDP increases, as there is more investment by firms and spending by consumers.

  2. An Empirical Investigation into the Causes and Effects of Liquidity in Emerging

    to default than a government security (thus US Treasury bill yields are often the base comparison for the spread). Yield spreads, therefore, contain information on the liquidity of such debt because the liquidity premium will be incorporated into the yield spread calculations.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work