ECON 3104/5304 - Australia/New Zealand Currency Union Analysis

This essay examines the policy implications of a hypothetical currency union between Australia and New Zealand, focusing on the potential benefits and drawbacks from New Zealand's perspective. It considers the reduction of transaction costs, the impact on interest rates, and the volatility of the foreign exchange market. The analysis also incorporates social and cultural factors, such as consumer preferences, immigration rates, and attitudes towards imported goods, highlighting how these elements could influence the success of the currency union. The essay concludes by assessing the potential effects on national income, economic inequalities, and the harmonization of fiscal policy, providing a comprehensive overview of the multifaceted impacts of such a union.

Running head: ECONOMICS
Economics
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Author note

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Currency union of Australia and New Zealand
Introduction
A currency union takes place when two or more groups of countries known to share a
common currency or peg their exchange rates in order to keep the value of currency at a
certain level. One of the main objective of the currency union is to synchronize and manage
the monetary policy of the country. However, a monetary union and dollarization can also
lead to loss of monetary policy for one of the both countries (Campbell and Chentsov 2017).
Currency union leads to the establishment of a single currency, single set of exchange rate
and there is also a single central bank which operates a monetary policy for the union
countries.
Effect of currency union
One of the biggest advantage which both the country will experience as a result of
currency union is the reduction of the transaction cost. Savings will increase as a result of
elimination of the transaction cost which are connected to the exchanging currency (Rana and
Ball 2016). The decrease in the cost of exports is quite useful for the small scale business in
order to achieve economies of scale. Due to the presence of low transaction cost, there will be
a huge amount of investment made by the companies.
The currency union with Australia will also be reducing average interest rate of New
Zealand. Since the interest rate of Australia is quite low compared to New Zealand, therefore,
the currency union will be benefitting New Zealand. The social factors that are known to
affect the business are the wealth of people, economic inequalities, access to education,
conflicts with society and personality of average consumer. The consumer preference and
buying habits are also considered as social factors that are known to affect business (Rees,

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Smith and Hall 2016). The cultural factors which are known to affect the business are
creativity of people, fashion trend, lifestyle and influence of social media.
It have also been found out that the foreign exchange in New Zealand exhibits a
greater volatility compared to the Australian market. Therefore, in this case, the currency
union might help in reducing the volatility of the foreign exchange market in New Zealand.
New Zealand known to have stable environment government and it also have strong rules and
regulations which makes them quite successful in business. The social system of the country
is also very good in nature and it depends on business with other countries.
Social / cultural factors of buisness
The social and cultural factors which is known to affect business are the various
customs, traditions of all people in Australia and New Zealand. The social / cultural factors is
one of the most important factor which will be influencing the decision of the marketing
managers. One of the major socio-cultural factors which will be influencing business
decisions is changing the preference of the consumer. The social or the cultural changes can
have an impact on the company based on how the moods of the audience shifts over time
(Campbell and Chentsov 2017). The racial as well as gender attitudes are also known to
impact work environment. Therefore, it can be said that the social and cultural factors will be
affecting the internal decision making process of the company. The currency union with
Australia will also be reducing average interest rate of New Zealand. Since the interest rate of
Australia is quite low compared to New Zealand, therefore, the currency union will be
benefitting New Zealand in many ways.
Impact of currency union on social and cultural factors of business.
Since both Australia and New Zealand will be using the same currency, the national income
for both the countries will be quite similar and the economic inequalities will also reduce.

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The purchasing power of both the countries will develop as a result of currency union.
Preferences of consumers will also be affected since the currency union known to create
pressure for harmonization of fiscal policy which will be affecting the spending of the
consumers. One of the social factors of business is rate of immigration and emigration rates.
After the establishment of currency union, the rate of immigration from Australia and New
Zealand will reduce. Cultural factors are known to have a strong influencer on any business.
The imported goods of Australia in New Zealand will also be available at the same prize and
therefore the consumers attitudes towards the imported goods will change. As the imported
goods will be available at same price, the buying habits will also change, people will prefer
those goods which will be of better quality.

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Reference list
Campbell, D.L. and Chentsov, A., 2017. Breaking Badly: The Currency Union Effect on
Trade.
Griffiths, B., 2016. Why I voted to leave the European union. Quadrant, 60(9), p.10.
Leslie, J., 2015. New Zealand trade strategy and evolving Asian-Pacific regional economic
architecture. Asia New Zealand Foundation.
McConville, A., McCreanor, T., Wetherell, M. and Moewaka Barnes, H., 2017. Imagining an
emotional nation: the print media and Anzac Day commemorations in Aotearoa New
Zealand. Media, Culture & Society, 39(1), pp.94-110.
Rana, F. and Balli, F., 2016. Would Australia–New Zealand Be a Viable Currency Union?
Evidence from Interstate Risk‐Sharing Performances. Contemporary Economic Policy, 34(3),
pp.531-552.
Rees, D.M., Smith, P. and Hall, J., 2016. A Multi‐sector Model of the Australian Economy.
Economic Record, 92(298), pp.374-408.