If the entire world used the same currency, what would be the economic effect?
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M$4 Answers
However the issues are roughly the same as those Europe was faced with when considering the Euro, only even more extreme, as world economies differ from each other much more than European economies.
On the plus side...
- The expense of currency conversion is reduced
- The risk of currency fluctuations is removed from decisions
- It is overall easier and less risky to do business internationally
- A larger, more unified market is good for competition and consumers
On the minus side....
- Not all economies are the same, and they don't all move in sync
- When one economy needs lower interest rates, another might need higher interest rates
- Some important tools of economic policy are removed if countries all have only one currency
- It is especially hard to cope with "asymmetric shocks" which hurt only some countries
- To cope with those kind of shocks you'd need to either a) allow free movement of people between countries,so they can go where the jobs are, or b) provide financial support from countries doing well to those doing badly
- Neither of those things tend to politically popular, esp in bad times
So the likely impact of a single world currency to my mind would be small but worthwhile benefits in good and stable times, but risk dire consequences in bad or volatile times.
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M$
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M$
Now, if you mean a common currency, but with governments still able to create as much money as they wish, I suspect we'd see massive inflation and that currency being abandoned, unless there was only a single world currency provider to prevent various countries creating too much money to gain a bit of temporary wealth.
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M$
So sorry I'm not of help on this but hopefully my answer made you laugh.
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M$
@opher: Hasn't this already occurred, with everyone using different currencies? What's the difference between the two situations?
Tagging on to this excellent answer, consider that if the currency was the same everywhere, prices would end up (more or less) the same everywhere. Say in Africa somewhere you could buy wheat more cheaply than in the US. Traders would move in, and buy all the cheap wheat there, and ship it to the US where they can sell it for more. This would increase demand in Africa, and cause prices to increase there. The "more or less" part is because there is a cost to the shipping, so prices would not rise quite all the way to the US ones, but pretty close. The result of this is that a poor African will no longer be able to afford bread, because wheat prices are so high. The only way he can survive is to earn a lot more. This requires him to suddenly compete against people in the US, with their advantages of better education, better infrastructure, better governance, etc. Since he cannot, he starves, unless richer people give him charity. Not such a great idea, unless all the economies that join the unified currency are comparable in their strength.
> I think I'm a bit over my head. :)
Yes... it's kinda hard to explain briefly to someone that knows no economics. At least I put "asymmetric shock" in quotes for you. :)
Interest rates in one currency have to be (putting it a little bit simplistically) the same everywhere. Supposing you get 3% for your savings in one bank, and yet 7% on identical terms at another bank. Everyone (and esp the professionals that handle mega-bucks) would just move all their money to the higher rate.
But lower interest rates make it cheaper to borrow, so they encourage spending and investment and help to stimulate an economy.
By the same token, higher interest rates discourage borrowing for spending and investment and tend to slow down an economy.
Now imagine that Detroit and Silicon Valley are separate countries. Detroit is in a bad way and would like to have low interest rates to help the economy along. Meanwhile (in our example) in Silicon Valley, things are roaring ahead, house prices are shooting up, and people fear a dot-com-like bubble is in the making. So in Silicon Valley, if that was the scenario, and economic policy makers that saw the trouble looming., they would like to raise interest rates to calm things down a bit.
If Detroit and Silicon Valley were separate countries with their own currencies, it could be possible for them to have different interest rates to meet their different circumstances. But as they have a common currency they can't do that. (Because of the reason mentioned above... all the savers would just move their money.)
The main ways that a problem that only hit Detroit (in the jargon an "asymmetric shock", because it doesn't affect everyone in the US the same) could be handled are that either people move to where things are better, or the central authorities take resources from the places that are doing well to help out the places that were hit by the shock. Which is basically what happens when trouble strikes regions in one country.
But when the same thing happens across national borders, people can't move, and the better off countries aren't all that enthusiastic about helping the ones that have problems.
The European Union is an intermediate case here because people can move around within it, and the countries are a bit more willing to help each other out when trouble strikes.
Another important thing that happens with currencies is that when there is a recession in just (let's say) Japan, Japanese interest rates fall. That means people move their money out of the Yen into other currencies where they get a better rate. The effect of that is to reduce the value of the Yen, i.e. its exchange rate falls. This makes Japanese products cheaper to buy in other countries, and should help Japan to recover.
Again if everyone has the same currency, and only Japan has a recession, that effect can't happen, and the necessary adjustments have to made in other, more painful, ways. Like for example unemployment going up and wages going down until a point is reached where Japanese goods are sufficiently cheap to get people buying them again.
> though I'm not entirely sure how one goes about tinkering with that...
Governments and central banks (like the Federal Reserve) have quite a variety of ways of influencing these things. One way the Yen could be reduced in value is if they in effect "made more Yen". That's been happening in various countries under the grand sounding name of "quantitative easing".
http://news.bbc.co.uk/1/hi/business/7924506.stm
Oh, I see... I get the Japan example, though I'm not sure I understand the Detroit/Silicon Valley example, but I see what you're saying. If one population experiences economic troubles, there are some ways to manipulate supply/demand, interest rates, and the value of the currency itself (though I'm not entirely sure how one goes about tinkering with that...) in order to help that population out of the economic hole. Very well-explained, thank you. :)
I'm not sure @opher's point is quite right. But I don't have the time to do any more economics thinking today. :)
I'm afraid the issues about why things end up with different prices in different countries are quite complicated. You might want to read up about "Purchasing Power Parity" (PPP) for starters if you're interested.
http://fx.sauder.ubc.ca/PPP.html
http://www.marginalrevolution.com/marginalrevolution/2010/06/purchasing-power-parity.html
On top of that there are "capital flows" that aren't about buying products, but about investing or speculating, and which also affect exchange rates.
How do interest rates meet up with currency? You're talking about mortgages and loans and whatnot, right? Also, how exactly would economic crises/asymmetric shocks affect the currency?
Sorry, I'm a bit new with economics. It just occurred to me yesterday that it was an interesting question to ask, but I think I'm a bit over my head. :)