Charles University in Prague Faculty of Social Sciences Institute of Economic Studies

Bachelor Thesis Influence of the single currency on the trading volumes of EMU members and the Czech Republic

Author: Daniel Sopovˇ Supervisor: Doc. Ing. Oldˇrich Dˇedek,CSc. Academic Year: 2009/2010 Declaration of Authorship

The author hereby declares that he compiled this thesis independently, using only the listed resources and literature.

The author grants to Charles University permission to reproduce and to dis- tribute copies of this thesis document in whole or in part.

Prague, May 20, 2010 Signature Acknowledgments

I am deeply indebted to my academic supervisor doc. Ing. Oldˇrich Dˇedek,CSc. whose help, stimulating suggestions and encouragement helped me to write and finish this thesis. I would like to thank to RNDr. Michal Cervinkaˇ Ph.D., PhDr. Ladislav Kriˇstoufekfor some hints, PhDr. Boril Sopovˇ MSc, LL.M. for his advises about writing this thesis and also I would like to express my gratitude to all those who gave me the possibility to complete this thesis, especially my family. Abstract

In this thesis, we focus on the impact of the single European currency on the trade volumes of EMU countries and the Czech Republic. We built on Rose’s gravity model, which explains to us, although not very accurately, possible impact of the single European currency on the trade volumes. We centre our research on trade among 25 countries, including EU countries, Switzerland, Russia, Ukraine, USA, Canada and Mexico. We use gravity model and do regression, to compare and analyze data for 8 chosen EU countries, including those, that were in EMU and using from the beginning, those that declined Euro and the Czech Republic, which has not adopted Euro yet. The main contribution of this thesis is a prediction of possible impact on trade in the Czech Republic, if we accepted Euro. This prediction will be based on analysis from other countries and its comparison.

Keywords Gravity model of International Trade, European Currency, Panel Data

Author’s e-mail [email protected] Supervisor’s e-mail [email protected] Abstrakt

V t´eto tezi se soustˇred´ımena dopad jednotn´eevropsk´emˇeny na objem obchod˚u mezi st´aty s ˇclenstv´ımv EMU a Ceskouˇ republikou. Vyuˇz´ıv´ameRoseov´eho gravitaˇcn´ıhomodelu, kter´yn´amvysvˇetluje,aˇckoliv ne velmi pˇresnˇe,moˇzn´y dopad jednotn´eevropsk´emˇeny na objemy obchodu. N´aˇsv´yzkumse soustˇred´ı na obchod mezi 25 st´aty, zahrnuj´ıc´ı st´aty EU, Sv´ycarsko,ˇ Rusko, Ukrajinu, USA, Kanadu a Mexiko. Pouˇz´ıv´amegravitaˇcn´ımodel a regresy k porovn´an´ıa anal´yzedat pro osm st´at˚uz EU, zahrnuj´ıc´ıty, jenˇzjsou ˇcleny EMU a pouˇz´ıvaj´ıEuro od zaˇc´atku, ty jenˇzEuro zam´ıtli a Ceskouˇ republiku, jenˇzjeˇstˇeEuro nem´a. Hlavn´ım zamˇeˇren´ımt´etoteze je odhad moˇzn´ehodopadu na obchod v Cesk´eRepublice,ˇ pakliˇzeby pˇrijaloEuro. Tento odhad vysvˇetl´ıme pomoc´ı anal´yzyostatn´ıch st´at˚ua jejich porovn´an´ım.

Kl´ıˇcov´aslova Gravitaˇcn´ımodel mezin´arodn´ıhoobchodu, Evropsk´amˇena,Panelov´adata

E-mail autora [email protected] E-mail vedouc´ıhopr´ace [email protected] Contents

List of Tables viii

List of Figures ix

Acronyms xi

1 Introduction1

2 Gravity model2 2.1 What is it?...... 2 2.2 History of Gravity Model...... 2 2.2.1 Empirical foundation of gravity model...... 2 2.2.2 Theoretical foundation of the model...... 3 2.3 Common Mistakes in Gravity Model...... 5 2.4 Rose’s gravity model...... 6 2.4.1 Rose’s mistakes and its correction...... 8 2.4.2 Criticism and controversy...... 9

3 Economic and Monetary Union of the European Union and its members 12 3.1 Economic and Monetary Union...... 12 3.2 Very beginning of Economic and Monetary Union of the Euro- pean Union...... 12 3.2.1 First indication of EMU...... 12 3.2.2 Short steps to