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Unformatted text preview: 460 >> Open-Economy Macroeconomics chapter 19 Klaus Lahnstein/S tone/Getty Topham/The Image Works O JOIN OR NOT TO JOIN, THAT IS the question. Not long ago, the menu in a French bistro listed prices in francs, the menu in a German wursthouse listed prices in marks, and the menu in an Italian trat- toria listed prices in lira. Today, however, menus in all three countries list prices with a “ ” in front—the symbol of the euro. The euro came into existence on January 1, 1999. France, Germany, and Italy all gave up their national currencies in favor of the euro. So did most, but not all, of their neighbors. The new “eurozone”—the group of countries using the euro—has a combined GDP almost as large as that of the dollar zone, otherwise known as the United States. But not all of Europe is part of the euro- zone. The most conspicuous holdout is Britain, which has decided to keep its na- tional currency, the pound, for the time being. Why hasn’t Britain adopted the euro? EURO DILEMMAS T Part of the answer is national pride: if Britain gave up the pound, it would also have to give up currency that bears the por- trait of the queen. But there are also serious economic concerns about giving up the pound in favor of the euro. British econo- mists who favor adoption of the euro argue that if Britain used the same currency as its neighbors, Britain’s international trade would expand and its economy would be- come more productive. But other econo- mists point out that adopting the euro would take away Britain’s ability to have an independent monetary policy and might lead to macroeconomic problems. For the time being, those who want to keep the pound seem to have the upper hand: Britain doesn’t seem likely to adopt the euro anytime soon. But the argument will probably go on for a long time, because both sides have a point. To see why, we need to look at the special issues raised by macroeconomics in the open economy. What you will learn in this chapter: The meaning and measurement of the balance of payments The determinants of international capital flows The role of the foreign exchange market and the exchange rate The importance of real exchange rates and their role in the cur- rent account The considerations that lead countries to choose different ex- change rate regimes, such as fixed exchange rates and float- ing exchange rates Why open-economy considera- tions affect macroeconomic pol- icy under floating exchange rates Most of Europe has given up national currencies in favor of the euro, but for now, at least, the British are sticking with the pound. 461 Capital Flows And The Balance Of Payments In 2004 people living in the United States sold about $3 trillion worth of stuff to peo- ple living in other countries and bought about $3 trillion worth of stuff in return....
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This note was uploaded on 03/18/2009 for the course ECON 102 taught by Professor Erus during the Spring '09 term at Boğaziçi University.
- Spring '09