How important is labor mobility in determining whether an area is an optimal currency area?

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How important is labor mobility in determining whether an area is an optimal currency area?

How important is labor mobility in determining whether an area is an optimal currency area?

Answer & Explanation (1)

Explanation
The optimal currency area refers to a region that brings the balance of payment equilibrium and full employment due to mobility of factors and achieves the economic goals by using a single currency or by fixing the exchange rates without sacrificing the domestic economic goals like low unemployment.

Due to labor mobility between two countries, they can adopt a fixed or common currency and enjoy being in a flexible exchange system. Consequently, there will be factor mobility between them in response to any demand changes, keeping the currency the same. When the labor is mobile enough to move between countries in a geographic area, the concept of optimal currency persists in that area.

Verified Answer
Labor mobility is important through demand in that particular area in terms of factors is fulfilled if there is free mobility, retaining the economic benefits.

Countries in such an area can either fix their currencies or adopt the same currency and keep all the benefits of flexible exchange rates without incurring any of the costs. This implies that labor mobility plays a vital role in determining an area to be an optimal currency area.

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