Is Europe an optimum currency area? What will be an ideal ...

[j.rubin]

Is Europe an optimum currency area?
 
  What will be an ideal response?

Question 2

Explain why it may make sense for the United States, Japan, and Europe to allow their mutual exchange rate to float?
 
  What will be an ideal response?

[juliaf]

Answer to Question 1

An open question. I think yes, the area's economy is closely integrated with its own: most EU members export from 10 to 20 percent of their output to other EU members. But still, the law of one price does not apply to many products such as the auto market. In 1998, prices for the BMW 520i varied by as much as 29.5 percent between the United Kingdom and the Netherlands. Prices for the Ford Fiesta varied as much as 43.5 percent between the United Kingdom and Portugal
The text is more critical, claiming: The extent of intra-European trade is not large enough, however, to give us an overwhelming reason for believing the European Union itself is an optimum currency area. Also, the text cites the fact that may be price convergence has more to do with Internet marketing than optimum currency area. The book concludes that on balance, it seems doubtful that the 1992 measures have yet pushed Europe dramatically closer to being an optimum currency area.

Answer to Question 2

Even though these regions trade with each other, the extent of that trade is modest compared with regional GDPs and interregional labor mobility is low.