James Leroy Wilson's blog

Wednesday, January 12, 2005

A Common Currency Creates More Wealth

Fred Foldvary writes:

The world now has fiat money based on nothing, and the various currencies fluctuate against one another, making it difficult for international trade, since the profit from trade depends in large part on the value of foreign currencies when one receives funds.
That's why several countries in Europe have switched to a common currency, the euro. In Latin America, several countries have adopted the US dollar as a currency. Theoretically, this should boost trade and increase efficiency. But does it really?

Yes. A study by Frankel and Rose on currency unions found that a single currency does indeed increase trade and productivity. For example, if Canada and the USA were a single country, one would expect as much trade between the Canadian provinces and US states as among the provinces. But in fact Canadian provinces trade among themselves 12 to 20 times more than with the United States, after adjusting for distance and size.

This is not all due to trade barriers, which have fallen with the free-trade treaty between Canada and the USA. Data from 200 different countries provide similar results. Countries with the same currency trade over three times as much with each other as countries with different currencies.


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