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Date: Mon, 13 Dec 1999 10:03:00 -0800 (PST)
From: levine@haas.berkeley.edu
To: e201b-1@haas.berkeley.edu, e201b-2@haas.berkeley.edu
Subject: 4 questions and answers
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Q1: What are the main reasons for having a common currency Euro for the  EU?

        Transactions of money and trade will less expensive because currency
exchange cost will disappear.  Saves the costs of hedging exchange rate risks
(some monetary, others due to the drain on managerial attention) or the risks
of not heding fixed but adjustable rates.  Makes price differences more
transparent across borders, which may increase trade.  Economists do not fully
understand why, but beyond the measurable effects of the effects I just
mentioned, a common currency increases trade even more than these slightly
lower transaction costs can explain.
        The process of qualifying for unification also required lower 
inflation
and deficits, which many economists and politicians desired.
        The main arguments for monetary unifications were political, not
economic, having to do with integrating Western Europe.

Q2: Beside losing its monetary authority, what are the reasons that the UK 
does
not want to join the Euro? I believe the Government has a different opinion
than the public. What are these arguments?

As you note, the economic reason is fear of losing control over domestic
monetary policy.  As with the decision to join, the UK's decision not to join
was largely political, choosing NOT to unify as rapidly with Europe on 
monetary
and lots of other matters (social charter that may regulate working 
conditions,
etc.).

Q3: In my notes, I wrote "You don't get rich by exporting -- you get rich in
the short run by importing." What do you mean?

I said that unclearly.  I should have said, "You do not raise your standard of
living by exporting; you raise it by importing."  At the same time, exports 
are
the price of imports, so you raise your grandkids' standard of living by
exporting intsead of borrowing to pay for the imports.  (Unless the imports 
are
high-value investment goods...)

Q4: I also wrote in my notes: "Trade deficits and exchange rates can't be used
to describe a country's prosperity."  If trade deficits and exch. rates can't
be used to describe prosperity, what is the best measure? At first GDP comes 
to
mind, but in my day 2 notes, there are all sorts of reasons why GDP isn't a
good measure, the most poignant one being: "2 countries have the same GDP, but
one country has twice as many people -- this country has lower per capita GDP,
and is poorer than the first country."
        CRUX: is per capita GDP a good measure of prosperity?

Per capita is a pretty good measure of prosperity and living standards.  The
list we gave are all the components of "the good life" it leaves out.  On
average, rich nations have higher life expectancy, etc., so GDP per capita is
not too misleading, but it clearly can be (as we pointed out).  Thus, no 
single
measure suffices, and a combination of measures can be useful.



David I. Levine                 Associate professor
Haas School of Business    ph: 510/642-1697
University of California    fax: 510/643-1420
Berkeley CA  94720-1900                            email:
levine@haas.berkeley.edu
http://web.haas.berkeley.edu/www/levine/