OPTIMUM CURRENCY AREAS

OPTIMUM CURRENCY AREASOPTIMUM CURRENCY AREA {OCA} also known as optimal currency region is a geographical arena which is meant to maximize economic efficiency in order to have entire region to share single currency.It describes the optimal characteristics for the mergers of currencies or the creation of a new currency. The OCA may be larger than a country for example creation of euro zone was that the individual countries of Europe did not reach to form an optimal currency area , but Europe as a whole does form an optimal currency area.

The main characteristics of optimal currency area are:

  1. It promotes free labour mobility across the entire region.
  2. It promotes openness with capital mobility and price and wage flexibility across the region so, that the market forces of demand and supply automatically distributes money and goods to where they are needed.

It allows automatic fiscal transfer to redistribute money to the areas which are adversely affected by above two characteristics.It usually takes the form of redistribution of taxes to less developed countries. but there is a concern that better off countries would rarely give up their revenues.

There are additional criteria that have been suggested for OCA are:

  •  product diversification
  • homogeneous preferences
  • commonality of objectives

The classical case for OCA assumes not only a similarity among participating countries but also high level of economic integration on the whole. The best example is European union following the same currency euro across 12 European countries.

If we try to explain in simple terms- usage of common currency over a large number of nation can lead to increase in overall trade in the region in which some country may not benefit at all but the overall benefit of the region will overcome it.It will increase the equality across the regions i.e low developing regions will benefits from the redistribution of resources. As the free trade in increases, the gross domestic product of each and every nation in the union will rise and the concept of  comparative advantage will function across the region.

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