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Monetary Unions
Unit 13 - Lesson 8.2
Learning outcomes:
Explain the concepts of trade creation and trade diversion in a
customs union.
Explain that a monetary union is a common market with a common
currency and a common central bank.
Discuss the possible advantages and disadvantages of a monetary
union for its members.
Trade Blocs
When a Trade Bloc is created patterns of trade between countries change
and can:
1. Trade Creation: higher cost items within a country are replaced by
lower cost imported items from other members of the Trade Bloc.
2. Trade Diversion: when trade is diverted from a more efficient
exporter to a less efficient one due to the formation of a Trade Bloc.
a. Reason against Trade Blocs and for more Global Trade
Liberalization (WTO)
Trade Blocs do have the ability to improve Social Welfare and
Allocative Efficiency, but only if the gain is Trade Creation.
Summary chart:
http://image.slidesharecdn.com/internationaleconomiccooperation-2013-151202125820-lva1app6892/95/international-economic-cooperation-12-638.jpg?cb=1449061118
Monetary Union
Economic Integration by Monetary Union includes all the characteristics of Trade
Bloc, but takes it one step further.
The countries involved agree to:
1.
2.
Common Currency
Common Central Bank - Monetary Policy
Most common example is the European Union. In order to create the EU, the
countries involved had to agree to a number of requirements called convergent
requirements. These include:
1.
2.
3.
Limiting inflation
Limiting budget deficit to 3% of GDP
Limiting Government debt to 60% of GDP
3.
4.