-Uncompetitive industries may lose jobs (unemployment)
-Strategic industries (e.g. energy) should be domestically provided.
-Increased UK Price levels make UK exports less competitive.
-Higher prices mean lower Exports.
-(X-M) decreases.
→ As technology increases and more countries primary products, the price of these products will fall.
→ The price of manufactured goods rises over time (they have positive YED).
→ This worsens Terms of Trade, suggesting the country cannot import as many manufactured goods as previously.
-Reduction in transaction costs
-Makes trade easier
-Full price transparency
-No exchange rate volatility between members
-Better economic discipline- devaluation is not an option
-May help weaker countries establish credibility- leads to lower bond yields
→ Y2 is currently below LRAS; we are running a Negative Output Gap and unemployment is high.
→ Higher unemployment means that firms can negotiate lower wages from workers.
→ Lower wages = lower costs, shifting SRAS to the RIGHT.
→ We reach market equilibrium at Y1 PL3.
Exports - Imports
lower
(you're adjusting UP to account for the lower cost of living and rise in real purchasing power)
Commodity exporting countries will experience a worsening terms of trade over time.
