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3.1.1 – Growing economies
Globalisation Growing power of Asia (China and India)
- This is the process in which national economies have CHINA INDIA become increasing integrated and interdependent. POPULATION World’s biggest: 1 in 5 of people By 2022 expected to surpass China’s
- Causes of globalisation – Trade liberalization, trading blocs, growth of MNC’s, technological advancements and mobility of labour and capital. worldwide live there. By 2019 – 1. population and become the largest billion. This will fall after 2030. One child policy slowed growth POPULATION Aging population – known as the 4-2- STRUCTURE phenomenon. Reduced supply of labour
- Literacy rates and upward pressure on wages
- Health indicators o Infant mortality rates o Incidence of diseases o Access to clean water
- Mobile phone use Growing power of other emerging countries Mexico
- Mexico is attracting increasing levels of foreign direct investment (FDI).
- Economists forecast Mexico’s economy to grow to the fifth-largest in the world by 2050, primarily as a result of growth in its manufacturing and energy sectors.
- This growth is expected to add to the rising income levels and purchasing power of Mexico's middle-class consumers. Mongolia
- Mongolia’s economy is projected to accelerate to 5.2% growth in 2023 from 4.7% in 2022 as mining and exports expand and the post-pandemic recovery in services continues.
- Growth is also anticipated to be supported this year (2023) by household consumption, which is expected to remain steady as the labour market improves, along with substantial public investment. Young population (ICT literate and 50 Indicators of growth
- GDP million English speaking). Good for jobs and economic growth
- Human development Index o Life expectancy GOVERNMENT Communist Government (less strict than previously). Setting up a business requires Gov. permission o Years spent in school o GDP
Democratic Government but not keen on foreign businesses in India (wants to retain culture) GDP GROWTH Annual GDP growth from 1989- was 9.3%. Likely to become world’s largest economy in 2020 Annual GDP growth from 2004-2011 was 8.3%. will overtake China by 2020 as fastest-growing economy. Why has the labour force grown? Industrialisation
- Process moves from a primarily agricultural industry to manufacturing of goods. Mainly seen in developing and emerging economies
- An example of this developing would be the movement of workers from rural to urban areas in China. Globalisation
- Workers can take advantage of job opportunities across the world rather than just in their home country – wider availability of jobs and labour. Increasing level of aspiration/education
- Education system improves giving the children higher aspirations and opportunities due to their higher ability.
3.1.1 – Growing economies
Growing power of Africa Implications of economic growth for individuals and firms –
- Historically, African countries have had a number of weakness such as the following factors: Trade opportunities for firms o Low standards of living
- Opens up new markets o High birth rates o Increasing wealth in countries such as China who want o Undeveloped level of manufacturing and uncompetitive o Dependent on commodities for export earnings and therefore vulnerable to changing prices o Poor communication due to difficult terrain as telephones do not penetrate the rural areas that many people live in.
- Africa gains aid from China and by the end of 2009, they received 45.7% of China’s cumulative foreign aid. It is important to China as a foreign policy instrument as they may have access to the Western brands o British provenance creates opportunities for individuals with the appropriate skills ▪ Fashion ▪ Finance natural resources in Africa. Africa’s economy grew by 5% in comparison to 1% in Europe. The ▪ Cars savings rate of Africa is 17%, which is half of the average in middle income countries which makes ▪ Arts it more expensive for the public and private sectors to get funds as they have higher borrowing costs. Rapid population growth has complicated efforts to reduce poverty and eliminate hunger in Africa. The current population of 1.1 billion is expected to double by 2050, which is not sustainable.
- South Africa has grown steadily since 2009 with the manufacturing sector developing (now 30% ▪ Education
- In developing countries, rising incomes can lift people out of poverty as it is estimated in China that half a billion people were lifted out of poverty due to the average 10% growth see dramatic changes in their level of income rate.
- At some point, they might wish to substitute leisure for work as,
- The main measure used is Gross Domestic Product (GDP) per capita at higher levels of income, they satisfy their financial requirements. This will change employment patterns
- Increased incomes allow workers more free time and the ability to retire, and enjoy the quality of their life, at an earlier age
- This is the most commonly used method to measure a country’s living standards. As GDP per
- There will also be a shift in the type of employment, moving from capita rises, it is assumed that living standards in that country also rise more agricultural or low skilled jobs to more technological and
- It is common for GDP per capita to be expressed in US$’s, which allows for direct comparison high skills jobs between nations Conversion of nominal to real values
- Nominal value is expressed in monetary terms. It does not take into account inflation (the average level of prices)
- Real value does takes into account inflation.
- Short-run economic growth is measured by the annual percentage change in real national output, real national income or real GDP Constant and current prices
- Constant prices are prices that have been adjusted for inflation. o They are real values.
- Current prices are prices that have not been adjusted for inflation. o They are nominal values.
3.1.1 – Growing
economies
Index numbers
- An index measures changes in a representative group of data.
- Indices are commonly used in economics and business in order to analyse raw data.
o Common examples are the CPI, the RPI and the FTSE 100.
- Business leaders and economists frequently use index numbers when making
comparisons over time
- An index starts on a given number e.g. year, the base number or base year, at an index number of 100 o This is called the base period
- In subsequent years, percentage increases may push the index number above 100 and percentage decreases push the figure below 100 o An index number of 102 means a 2% rise from the base year, and an index number of 98 means a 2% fall from the base year
- Index numbers help to understand the
significance of a change
- They are easier to interpret than large numbers
- We always compare with a base number or year Example
3.1.2 – Trade and growth
Increasing trade liberalisation The role of specialisation and increasing specialisation by country
- Exports are the selling of goods and services to other countries
- Specialisation occurs when economic units such as individuals, businesses, o If the UK sells a car abroad the money flows into the UK regions or countries concentrate on producing specific goods or services o If a tourist from abroad visits the UK the money flows into the UK
- Imports are the buying of goods and services from other countries o If a UK business buys raw materials from abroad the money flows out of the UK o If a UK business buys the film rights for a foreign film the money flows out of the country
- Exports minus imports makes up the Balance of Payments on Current Account. o This explains the financial relationship between the UK and the rest of the world
- As global demand changes so will imports and exports o A strong economy will import goods and services in order to meet its needs
- Specialised use of workers within an organisation is called the division of labour
- Specialisation is likely to lead to increased output per worker (productivity) as the workforce have a better understanding of their job role
- This will help provide a competitive advantage as businesses improve the quality of their products
- Specialisation increases output as economic units become more effective and efficient in what they produce due to: o Greater understanding of the requirements of production o Each economic unit can specialise in what they are best at o This might lead to an increase in domestic consumption o Efficient use of time as there is no switching between tasks o However, it might be components or raw materials required in the production o Technical economies of scale as capital equipment is used to produce process for goods and services goods and services o These products might then be exported
- The increased output can then be exchanged for other goods and services that
- As global demand and supply changes so will imports and exports the economic unit is not as good at producing o If an economy increases its productive capacity this will allow it to increase
- Specialisation allows for the exchange of goods and services between the supply to the rest of the world economic units o This will lead to an increase in exports BENEFITS DRAWBACKS o Of course, countries will need to supply goods and services that are
economies and societies.” Reduced cost of transportation and communication
- This has made the movement of goods and services across the globe faster and cheaper
- Improved transportation services such as shipping and airlines have made this possible
- Improved infrastructure e.g. roads and internet has also made globalisation easier
- Use of the internet, e-commerce and mobile technology has made it quicker and easier to communicate
- Advances in technology have revolutionised communications, making it easier to communicate globally and lowered the cost of communication e.g. teleconference and Skype v face to face meetings Increased significance of global (transnational) companies − Less developed countries might use up their non-renewable resources too quickly, so they might run out. − Countries could become over dependent on the export of one commodity, such as wheat. If there are poor weather conditions, or the price falls, then the economy would suffer. Increased significance of global (transnational) companies
- Many large organisations have taken advantage of lower trade barriers, labour mobility and cheaper transportation to grow rapidly and enter previously untapped markets Increased investment flows (FDI)
- There has been a significant relaxation on the rules and regulations surrounding the movement of capital, which can move either freely or at very low cost quickly across the globe. o This has led to an increase in foreign direct investment.
- The greater freedom of movement of capital enables businesses to invest outside their country of origin.
- This may lower their own costs of production and improve economic prospects and job opportunities in the invested country.
3.1.2 – Trade and growth
Trade liberalisation and economic growth (continued) Growth of the global labour force
- Growth, in terms of both quantity and quality, has led to a diverse international workforce. With increasingly freer movement of labour this has transformed workforces globally
- In many economies, such as the UK, we are seeing low skilled foreign workers employed in industries that do not require high rates of human capital
- At the same time we are seeing highly skilled workers from the same countries, but employed in industries where there is a high human capital requirement Structural change
- National economies have been transformed with countries moving away from the primary sector to manufacturing, whilst other economies have moved from the secondary sector to
services (^) Types of FDI Foreign direct investment (FDI) and link to growth
- Horizontal FDI: Here, investors put their money on foreign
- Foreign Direct Investment (FDI) is investment made by a business or other entity from one
companies that operate in the same industry—niche in which the country into the production capacity of a business or other entity from another country e.g. investor operates domestically. This way, firms expand their factories. existing business into different nations.
- Most FDI is horizontal, with the duplication of production facilities in different countries. Some
- Vertical FDI: When a company acquires or merges with a foreign vertical FDI occurs where different stages of the production process occur in different countries. company to add more value to its supply chain, it is called a
- It was originally believed that FDI occurred due to differing interest rates in different countries. vertical FDI. For example, if an automobile company invests in a Businesses would transfer money globally to where they could obtain the highest interest rate. foreign company manufacturing semi-conductor chips, the
- Other theories believe that businesses cluster production together geographically or operate in vertical integration would improve supply chain. countries that are close to them geographically.
- Conglomerate FDI: Here, investors invest in completely different
- Japanese theorist Terumoto Ozawa developed the ideas of Michael Porter, believing that segments—unrelated to their existing operations. businesses would operate where they could gain a competitive advantage.
- Platform FDI: It is a unique form of FDI—businesses invest in a
- At first, we have a less developed country that can be exploited in terms of costs e.g. labour by foreign company to manufacture goods. They then sell the multinational corporations. This benefits the MNC but also creates income and wealth in a finished product in a third country. country.
- This leads to economic growth that attracts inflows of FDI but also creates wealthier domestic businesses. As a result the economy and domestic businesses grow.
- Finally, rising standards of living and greater use of technology lead to more FDI, both in and out of the country. Domestic businesses have acquired the skill and knowledge base of the MNC. External economies of scale occur, where domestic businesses grow in order to supply the MNC. Eventually, some domestic businesses are so large that they start to invest abroad themselves.
3.1.2 – Trade and growth
Pros and cons of FDI Advantages of FDI for business making it
→ Access to cheap labour – not always regulated labour laws in
developing countries → Access to resources/raw materials – may invest in oil-rich
countries for better access to develop oil fields → Avoidance of tariffs – may not have to pay foreign tariffs if
they invest to a country inside a trade bloc → Reduced transport costs – e.g. as Nissan is producing in the
UK, they have lower costs to sell in the UK as well → Use of local knowledge for markets – better knowledge from
o Members agree to the removal of trade barriers amongst themselves and a common approach to trade barriers when dealing with countries outside of the bloc o In a sense the bloc is now acting as one homogenous group
- Common markets
- Trade diversion
- Trade diversion is when trade shifts as a result of membership of a trading bloc from a low cost producer to a high cost producer
- A member shifts from buying from a low cost supplier outside of the trading bloc to a high cost producer within the trading bloc. This is due to not having to pay tariffs to that producer
- o Members agree to the removal of trade barriers as well as the freedom of movement of factors of production within the bloc o Often also involves the agreement of common economic policies
- Economic unions o Comprises of the features of both a customs union and a common market, including common economic policies
Customs union
- The EU is not a free trade area as such, but a customs union
- A free trade area is a group of countries that have removed most or all tariffs and/or quotas
- A customs union will involve internal free trade amongst member states, but also includes a common external tariff
- Each member of the customs union cannot pursue their own international trade policy, instead trade negotiations are conducted on behalf of all member states
- The EU is the biggest customs union in the world with a 15.5% share of world trade
- It is important to differentiate a customs union from the Single European Market (SEM), which in addition to having no internal trade barriers and a common external tariff, also involves the free movement of goods, services, capital and labour which promotes deeper economic integration and market liberalisation
3.1.3 – Trading blocs
The Single European Union
From member point of view Advantages Disadvantages Trade creation Trade
is encouraged within member states because there are no barriers, so additional trade is created within the bloc. Trade diversion The existence of the common external tariff diverts trade away from the EU. Goods within the SEM may be more expensive, and this could damage consumer welfare. Competition Stronger competitive forces within the SEM can drive productive and dynamic efficiency, which will benefit consumers. Monopolies In some markets e.g. gas and electricity, tariffs have seen significant merger activity and the creation of large monopolies seeking to exploit the available economies of scale.
From non-member point of view Advantages Disadvantages Access to
markets The SEM creates a market of 28 countries and a population of over 500m, offering significant scope for businesses to expand. Unemployment In some countries, workers may lose their jobs as production is transferred to member states with lower labour costs. Freedom of movement There is the right to live and work anywhere within the SEM without restriction which boosts labour mobility. Cost Membership of the SEM costs the UK around £15b per year. Trading bloc VS Customs union
- Trading bloc o A trading bloc is essential an agreement between countries to lower their import tariffs and perhaps extend this to reducing the use of non- tariff barriers to trade. o In a free trade area, each country continues to be able to set their own distinct external tariff on goods imported from the rest of the world.
- Customs union o A customs union is different from a free trade area, in which means no tariffs are charged on goods and services moving within the area. o It adds on a common external tariff on all products flowing from countries outside the customs union, unless specific trade deals have been established. o Revenues from import tariffs are combined for all member states. The countries in a customs union negotiate as a bloc when discussing trade deals with countries outside the union. o A good example is the recently introduced bilateral trade deal between the European Union and Japan.
Customs union VS Single market
- A single market is a deeper form of integration than a customs union.
- A single market involves the free movement of goods and services, capital and labour.
- In addition to a common external tariff, a single market also tries to cut back on the use of non-tariff barriers such as different rules on product safety and environmental standards replacing them with a common set of rules governing trade in goods and services within the common market.
- Countries such as Norway and Switzerland are outside of the European Union, but they are members of the EU single market, paying into the EU budget to take advantage of some of the benefits of the free flow of capital, labour, goods and services.
3.1.3 – Trading blocs
Stages of economic integration Different stages of economic integration between countries No Internal Trade Common External Tariff Factor and Asset Barriers Mobility Common Currency Common Economic Policy Free Trade Area X Customs Union X X Single Market X X X
- Its aim is to eliminate any barriers to trade between the three countries
- The agreement led to significant FDI into Mexico, particularly from the USA
- Often, production was transferred from the USA to Mexico, creating significant tension amongst American workers
- However, it is clear that NAFTA has led to significant growth since its introduction
- Impact on firms of trading blocs
- There are a large number of potential impacts, both positive and negative. Some of these include:
o Free trade within the bloc encouraging specialisation and
trade o Easier access to knowledge, workers and components o Economies of scale o Take advantage of favourable differences between members
e.g. taxes or labour costs o May reduce trade with countries outside of the bloc o Not all members may have same power o May damage domestic industries Growing interdependence
- Trading blocs create growing interdependence between member states as it is easier to trade with them
- This leads to a growing relationship with more imports to and exports from member states
- Closer contacts with economic agents leads to greater vulnerability as the impact on one member state has a greater impact on others
- This can be seen with the impact on the rest of the EU with the financial problems
caused by the Greek debt crisis
3.1.4 – Trade policy and trade negotiations
Protectionism Protectionism measures
- Protectionism is when a country takes action to protect its own
- Tariffs industries by restricting trade with other countries
o Taxes placed on imported goods that are not applied to domestic goods
- Through countries having a comparative advantage and o Consumers face a higher price empirical data it is clear that there are strong economic reasons o However, domestic industries are protected from overseas competition for international trade to occur
- Import quotas
- However, it can also be seen that developed and developing o A physical limit on the volume of imports entering a country nations may benefit in different
ways, or not at all o For example, Thailand has imposed a quota of 54,440 tonnes of corn on China
- As a result, there are a number of arguments that might justify
- Government legislation the implementation of protectionist measures o Countries might employ measures such as complex legal forms, health and safety
- Infant industries inspections and specific product specifications o Young industries are unlikely to be able to compete o These will discourage imports by raising costs against established MNCs in developed countries, thus
- Domestic subsidies require protection, at least in the short term o Government payments to domestic businesses to help reduce production costs and
- Dumping improve competitiveness o Over-production in developed countries may be
- Embargoes released into the markets of developing nations, which o A total ban on imported products undercuts domestic prices and domestic producers o The UK has imposed embargos on Syrian oil exports as a political measure may be forced to leave the market
- Domestic employment o Protectionist measures might help to protect domestic jobs if infant industries are allowed to grow or local businesses aren’t undercut by MNCs from developed countries
- Externalities o Some goods, such as illegal drugs and weapons, may be considered to have significant harmful effects on society and should be blocked from domestic markets
- Balance of Payments o Placing restrictions on imports may help to reduce a balance of payments deficit on current account Diagrammatic representation of tariff – Without international trade
3.1.4 – Trade policy and trade negotiations
- The Group of 20 (G20) is a forum through which 20 leading countries can debate
- Progress towards complete trade liberalisation has increased in recent years. a wide range of international issues linked to international financial stability One of the main organisations involved in this has been the World Trade
- Its membership consists of 19 countries and the EU, together accounting for Organisation. 80% of world trade
- Established in 1995, its purpose is to promote free trade by persuading
- It holds an annual summit, most recently held in China in 2016 and Germany in countries to abolish import tariffs and other barriers 2017
- The WTO is the only international agency overseeing the rules of international
- G20 has been criticised for its exclusivity as most countries of the world have no trade direct say in its meetings
- It polices free trade agreements and settles trade disputes between
governments and organises trade negotiations Conflicts between trading blocs and WTO
- WTO decisions are absolute and every member must abide by its rulings
- The WTO seeks to reduce trade barriers in order to promote world trade.
- There are currently 160 members
- Trading blocs might conflict with the WTO because they: o Distort trade by creating barriers
- Most Favoured Nation (MFN) status is required for all members providing trade advantages such as reduced tariffs o Negatively impact on non-members
- o Allocate resources in an inefficient manner o Lead to protectionist policies between trading blocs o Contravene a key requirement for WTO membership in that all members must have MFN status The role of the International Monetary Fund (IMF)
- The International Monetary Fund (IMF) is comprised of 189 member countries that looks to promote monetary cooperation e.g. exchange rates and international payments and to facilitate trade globally The role of The World Bank
- The World Bank provides finance and other assistance e.g. expertise to
- A key area is helping macroeconomic stability in developing countries
- This helps to promote economic growth and the reduction of poverty developing countries
- This takes a number of forms, including: o Low interest loans, credit and grants o Investment in education, health infrastructure and an array of other areas that benefit social welfare
- It has set two specific goals to be achieved by 2030: o To end extreme poverty, limiting the number of people who survive on $1.90 a day to 3% of the population o Promoting shared prosperity by supporting income growth for the Bilateral trading agreements
- Bilateral trading agreements take place between two countries or trading blocs
- Preferential trade agreements will take place that remove barriers to trade such as protectionist policies
- The UK is likely to negotiate bilateral trading agreements with a number of countries after Brexit
- As a member of the EU it could not do this as it had to adhere to membership rules bottom 40% of people in all countries
3.1.5 – Exchange rate changes
The impact of movements in exchange rates
- Imagine an exchange rate is in equilibrium at D1S1 with £1 able to buy $1.50.
- If there was an appreciation in the exchange rate, this would increase the D for £s and there would be a shift to D2. This would mean that £1 is now able to buy $1.60.
- A depreciation in the exchange rate might mean that £1 is now able to buy $1.40.
Price $ per £
S
S2 $1.
$1.
$1. D The impact of exchange rate changes on businesses
- There is a significant impact on businesses of movements in exchange rates. In general:
o If the exchange rate appreciates this will make exports less attractive
in terms of price competitiveness and imports more attractive o However, a stronger pound will lower the relative price of imports and
may reduce the cost of imported materials o There is no certainty as to the exact price of a currency on a daily
basis, meaning that businesses will struggle to budget as they do not know their exact costs
- When an exchange rate weakens, it increases the price of imports, and potentially the rate of inflation. This is especially true for businesses who rely on the import of primary raw materials
the expected return on investment o Given that we are looking at global businesses it is likely that there will
Q Quantity
The impact of exchange rate changes on FDI flows
- If we assume the £ is strong (If we assume the £ is weak, the opposite will happen)
- FDI is the flow of capital from one country to another, in o Aggregate demand order to gain a lasting interest in an enterprise in the foreign ▪ Encourages imports and discourages exports leading to a fall in AD country. o Economic growth
- A depreciation in the currency means the country’s wages ▪ Output and investment will be cut in the short term leading to a fall in GDP and production costs have fallen relative to other countries. o Employment This makes the country more internationally competitive and ▪ Reduced output leading to lower employment it is likely to attract more FDI. o Current account ▪ Fall in exports and rise in imports leading to a worsening BoP on current account Short term capital flows
The Marshall-Lerner Condition (MLC)
- This states that a depreciation of the exchange rate will only improve a balance of trade deficit, if the sum of the elasticities of demand for net exports is greater than 1.
- If the elasticity of demand for net exports is less than one the current account (balance of trade) will worsen.
- A depreciation will lead to a positive quantity effect as imports will fall and exports will increase.
- However, there will be a negative cost effect as we will pay more for our imports.
- If the quantity effect is greater than the cost effect, then the MLC holds true.
- Currency devaluation
- These are comprised mainly of speculative capital movements by wealthy individuals and companies
- They can form “hot money” flows in currency markets or shifts in stock prices around the globe
- Whilst it forms billions of dollars on a daily basis, it can be highly volatile in nature and create significant disturbance to the balance of payments as well as upsetting confidence and expectations in an economy Long • term capital flows o For a currency devaluation to lead to an improvement (e.g reduction in deficit) in the
- These are comprised mainly of FDI, long term investments or current account, the sum of price elasticity of exports and imports (in absolute value) sources of finance for governments and MNCs must be greater than 1
- These can help enhance supply side improvements through making finance available on a global level and not just within a domestic economy
- However, only large MNCs tend to participate in this, which may distort competition at the expense of smaller firms
- The global economy has become increasingly reliant on long- term capital flows for the expansion of globalisation, but as the credit crunch of 2008-12 demonstrated, the integration of
capital investments across borders can create major problems in the event of weakness in one area of the market (in this case, mortgage debt)
3.1.5 – Exchange rate changes
The J curve
- The J curve states that a depreciation can lead to a short term deterioration of a trade deficit before improving in the longer term
- This gives an explanation as to why the Marshal Lerner Condition often tends to less than one in the short term but greater than one longer term
- In the short run there will be a worsening of the trade deficit
- Over time the deficit will start to improve The Eurozone
- The Eurozone is a Monetary Union o A monetary union is a group of independent countries that share a single currency ▪ This is also known as a currency union
- Technically, the UK has a monetary union (across England, Scotland, Wales and Northern Ireland) but the largest currency union globally is the Eurozone
- The Eurozone came into existence on 1st^ January 2002, and initially had 12 members
- This has now expanded to a currency union of 19 countries (Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain) Conditions necessary for the success of the Eurozone
- The conditions for a country joining the Eurozone are known as the ‘convergence criteria’. These include: o Control of inflation in line with the 3 best performing nations o Controlling the government deficit as a % of GDP o Controlling the government debt as a % of GDP o Control of interest rates in line with the 3 best performing nations o Managing the exchange rate so it does not deviate from a central exchange rate Pros and cons of belonging to the Eurozone Advantages Disadvantages Price Transparency, Competition and Efficiency In a currency union, price comparison is straightforward. This may help firms cut costs, as they will be able to find the cheapest product more easily and should encourage greater competition as there is greater transparency in prices. This should help increase efficiency as firms are forced to remain competitive. “One Size Fits All” Monetary Policy A currency union requires a single monetary policy. This means interest rates being set centrally for all Euro countries. E.g. if an individual country is suffering a downturn in economic activity, but the rest are booming the central Bank may want to increase interest rates, but that would simply worsen the recession for that country. Inward Investment Members of the currency union should be able to access other members markets and equally the country may attract FDI, releasing the potential for additional economic growth. Loss of National Sovereignty The transfer of money and fiscal competencies from national to community level, means economically strong and stable countries would have to co-operate in the field of economic policy with other, weaker, countries. Elimination of Exchange Rate Uncertainty Joining a currency union should end currency instability and a country should be more secure against currency speculation. Moreover, businesses would not face hedging costs to insure themselves against currency fluctuations. Economic Shocks External economic shocks may have an adverse impact which is exacerbated by constraints on monetary and fiscal policy meaning an individual government may find it difficult to react to economic shocks. Elimination of Currency Conversion Costs Converting between currencies has a cost for individuals and firms. Joining a currency union will remove these costs. Transition Costs Joining a currency union involves short term transition costs which would disappear once the new currency was fully
