Economics, 3rd Edition

Characteristics that Increase the Benefits of a Single Currency

High Degree of Trade Integration 

The greater the amount of trade that takes place between a group 

of countries – i.e. the greater the degree of trade integration – the more they will benefit from adopting 

a common currency. One of the principal benefits of a currency union, and the most direct benefit, is the 

reduction in transaction costs that are incurred in trade transactions between the various countries when 

there is a constant need to switch one national currency into another on the foreign currency exchange 

market. Clearly, therefore, the greater the amount of international trade that is carried out between 

member countries – and therefore the greater the amount of foreign currency transactions – the greater 

the reduction in transaction costs that having a common currency entails.

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768  PART 15  INTERNATIONAL MACROECONOMICS

The reduction in exchange rate volatility – another benefit of a currency union – will also clearly be 

greater, the greater is the degree of intra-union trade, since more firms will benefit from knowing with 

certainty exactly the revenue generated from their sales to other currency union members, rather than 

having to bear the uncertainty associated with exchange rate fluctuations.

SELF TEST 

What is meant by an optimum currency area? 

●

 List and discuss the key characteristics of an 

optimum currency area.