International Economics Eurozone - Essay Example

29). For instance, Germany is considered to have a comparative advantage in the production of cars in the sense that its cars are considered to be of the highest quality in the market. This creates the opportunity for the substitution of products that have the same factor intensity. The other condition for the occurrence of intra-industry trade is that the production processes of particular products should have fixed costs. This is to ensure that an increase in the production processes is advantageous in the sense that there will be a decrease in the unit costs of the product.

This condition is beneficial to both producers and consumers. Producers will be able to reduce the cost of production as they engage in mass production. They will enjoy economies of scale in times of low costs of production. Consumers on the other hand will pay less as more cars are being produced because low costs will be transferred to them. For instance, the more units Mercedes produces, the lower the unit cost of production. Possible welfare gains of intra industry trade There are two conditions that determine the occurrence of intra-industry trade and they include comparative advantage and economies of scale. . German citizens are able to get jobs hence improve their living standards.

An economy also records an increase in the number of exports and this translates to higher revenue collection. The revenue collected is used in funding projects across the economy and the country is able to improve on its social infrastructure such as hospitals and schools. Increase in imports also reflects that the economy is recording growth in its GDP which eventually translates to higher per capita income. Citizens will be able to meet their basic wants because of the improvement in their income.

Economies of scale also have the advantage of improving the social welfare of citizens in the sense that the growth of the industry will stimulate infrastructure development that will be utilized by both producers and the residents (Helpman & Krugman, 2009, p. 100). The other possible welfare gain of intra-industry trade is the provision of quality services because there is specialization in the production processes. Comparative advantages lead to the specialization of industries and this improves the productivity of such industries.

Countries are able to access a wider market that makes it easy for consumers have access to quality services and goods that are of high quality from specialized countries. Criteria used to define an optimum currency area. The general definition of an optimum currency area is that it relates to a geographical area where the use of a common currency would create the greatest economic benefit. The theory is closely related to Robert Mundell whose works have made numerous contributions to issues of currency.

There are a number of criteria used in defining an optimum currency