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One world currency and free trade

1. Discuss the advantages and disadvantages of having one world currency.

2.There are several trade agreements around the world which involve many countries. In North America, for example, there is the North American Free Trade Agreement (NAFTA). These trade agreements spell out the rules for trade amongst the nations which abide by the treaty.

Some advocates of NAFTA are in favor of expanding the agreement to include all nations in North and South America (although it is not clear if Cuba would be included).

Discuss the benefits and costs of such a sweeping trade agreement. Consider the various countries involved (you do not have to look at all of them!) and what it means for first and third world nations to join in such an agreement.

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The main disadvantage of a single currency would be the loss of the "shock-absorbing" capability of the present flexible currency. With a common currecncy, fiscal policy, movements of capital and labor, and changes in factor prices would be the only weapons against economic upheavals. Another disadvantage is the loss of autonomy for weaker nations. The most powerful countries economically speaking would control monetary policy. They would be the ones who would likely be able to compel the central bank to increase or decrease the money supply. Thus smaller countries would lose control of their economies.

A loss of income from seigniorage also occurs when a country gives up printing its own money. This is revenue that the national mint obtains from producing money. However, in the case of a global currency, likely the profits from seigniorage would be shared among all nations.

One of the primary reasons cited for a single currency is a reduction in currency "mismatches." If for example a person were seeking a loan from a bank, the bank might be reluctant to loan for more than a few years because the value of currency might fall. This would favor the borrower and cause the bank to lose money. Fears about currency ...

Solution Summary

Pros and cons of a one world currency and free trade agreements