7. Less transactions costs
Elimination of foreign exchange markets
within union eliminates cost of
exchanging one currency into another
Cost reductions amount to 0.25 to 0.5%
of GDP
8. Price transparency
One common unit of
account facilitates price
comparisons
Consumers “shop
around” more
Competition increases
Prices decline and
consumers gain
9. Will euro increase price transparency in a significant
way?
Large price differentials continue to exist
These have to do with
transactions costs at the retail level
and product differentiation
13. Price Certainty Price Uncertainty
P P
MC MC
X
P3
P1 P1
A
P2 A
Y
Q Q
Profit = A-(Area of ) Profit = A-(Area of )+X+Y
14. Profits are higher on average
when there is price certainty
Welfare will then depend on
degree of risk aversion
If risk aversion sufficiently high
price certainty is preferred by
firms
17. Next Week
Benefits & Costs of a Single Currency
We’ll develop Optimal Currency Area Theory
Read
Pelkmans, J. European Integration: Methods and
Economic Analysis 1st ed., pgs. 83–104 and 133–
155. 337.142 PEL.
