The Concise Encyclopedia of Economics
FEATURED TOPIC

Monetary Union

Paul Bergin

When economists such as Robert Mundell were theorizing about optimal monetary unions in the middle of the twentieth century, most people regarded the exercise as largely hypothetical. But since many European countries established a monetary union at the end of the century, the theory of monetary unions has become much more relevant to many more people....

Forming a monetary union carries benefits and costs. One benefit is that merchants no longer need worry about unexpected movements in the exchange rate. Suppose a seller of computers in Germany must decide between buying from a supplier in the United States at a price set in dollars and a supplier in France with a price in euros, payment on delivery. Even if the U.S. supplier's price is lower once it is converted from dollars to euros at the going exchange rate, there is a risk that the dollar's value will rise before the time of payment, raising the cost of the computers in euros, and hence lowering the merchant's profits. Even if the merchant expects that the import price probably will be lower, he may decide it is not worth risking a mistake. A monetary union, like any fixed-exchange-rate regime, eliminates this risk. One effect is to promote international trade among members of the monetary union.

READ MORE
ALSO OF INTEREST

Agricultural Subsidy Programs

Daniel A. Sumner

Fiscal Sustainability

Laurence J. Kotlikoff

Industrial Revolution and the Standard of Living

Clark Nardinelli

Standards of Living and Modern Economic Growth

John V. C. Nye

Public Choice

William F. Shughart II

Immigration

George J. Borjas

Health Care

Michael A. Morrisey

Return to top
FEATURED BIOGRAPHY

Alfred Marshall

(1842-1924)

lfred Marshall was the dominant figure in British economics (itself dominant in world economics) from about 1890 until his death in 1924. His specialty was microeconomics--the study of individual markets and industries, as opposed to the study of the whole economy. In his most important book, Principles of Economics, Marshall emphasized that the price and output of a good are determined by both supply and demand: the two curves are like scissor blades that intersect at equilibrium. Modern economists trying to understand why the price of a good changes still start by looking for factors that may have shifted demand or supply, an approach they owe to Marshall....

READ MORE