Essay About Exchange Rates And Exchange Rate

Exchange RatesEssay title: Exchange RatesGlobal Economic IssuesAssignmentExchange RatesQuestion 1Explain why the exchange rate is such an important ‘price’ in terms of the impact it can have on a country’s economic system.The exchange rate is an important ‘price’ in terms of the impact it can have on a country’s economic system. It can have an affect or be affected by many parties. Some for example, unemployment, inflation, growth and the trade balance between imports and exports. Since a currency’s price depends on the aggregate demand and supply of it, the exchange rate affects exports and imports. Whereas a strong currency lowers the price of imports, the price of exporting goods and services rises. Conversely, lowers a weak currency the price of exports but increases the costs of imports.

For example, supposing a holiday to France costs 300 Euros, a British person would be more likely to go when the exchange rate was 2.00 Euros per Pound as if it was 1.50 Euros per Pound.

This shows that the stronger the currency the cheaper the imports and the higher the demand for the imported goods and services, in this case the holiday. The flow continues circle wise since the increase in demand for imports increases the demand for Euros, which lets the Euro appreciate against the Pound, which makes imports more expensive but exports cheaper and so on. The fact that many countries have different goods and services lets the trade balance between imports and exports be similar. This makes the exchange rate stay close to one figure since only big differences in the trading balance can cause a noticeable change in the exchange rate.

Question 2Over the past 50 years, the world has moved away from fixed exchange rate systems towards a freely-floating exchange rate regime. Explain the factors that you believe have underpinned this move.

In deciding how the exchange rate is determined the government must choose among two major systems. Nowadays it is the freely floating exchange rate regime, which is mostly used instead of the fixed exchange rate regime, which started to be moved about 50 years ago.

Signing the International Monetary Fund (IMF) in 1944 also led to joining Bretton Woods where gold was the anchor to a fixed exchange rate. Big changes worldwide caused a collapse in 1971. The General Agreement on Tariffs and Trade (GATT) was found in 1947 and renamed in 1995 to World Trade Organisation (WTO), they moved away from fixed exchange rates after the Exchange Rate Mechanism (ERM) Crises but the main motive to restore world trade stayed the same.

The move away from fixed exchange rates can be explained by the many advantages of a freely floating exchange rate regime. Whereas in a fixed exchange rate system the government and country’s central bank interfere as soon as demand and supply of a certain currency are not in equilibrium, in a freely floating system, the price of a currency is determined by market forces in absence of the central bank. The biggest advantage is the cost, which no longer becomes necessary. Otherwise when the quantity needs to be matched, they have to impose restrictions on demand, offer it for foreign currency assets or buy pounds by paying with foreign exchange reserves. Because of the increasing global trade the optimal outcome, a fair and appropriate value is best reached through a freely floating exchange rate regime. The reserves stay constant, the balance of payments is equal and it is more robust in case of a shock.

Question 3Despite the general global move to a freely-floating exchange rate system, many countries have chosen to operate either a fixed or a ‘dirty floating’ exchange rate policy. Why do you think some countries have taken this approach and how successful have they been in sustaining this policy.

In addition to the advantages of a freely floating exchange rate system there are a few disadvantages, which should not be overlooked. Missing financial discipline, volatility and the fact that asset prices reflect beliefs about the future lead to an uncertain business climate and discourages global trade and foreign investment. These reasons and the disadvantages of a fixed exchange rate policy mentioned in number two made some countries choose a ‘dirty floating’ exchange rate regime. The USA for example are operating a ‘dirty floating’ system since 1973 where the government ‘pretends’ to have a freely floating policy but they intervene ‘secretly’ respecting informal guidelines that have been established by the International Monetary Fund (IMF). Those interventions are not only used to offset large and

menducational problems in international trade but also in their own political and political context.

4. Open-ended policies that discourage foreign investment and investment in Latin American economies.

The United States Government has a policy of open-ended programs that include the creation of a global public investment program in Latin America, including the participation of the nation of origin in this program. One such program involves the implementation by the IMF of a ‘private sector policy to create a single-market (or more accurately it is) public sector economic system called a global public investment program (GPP). This is a policy aimed at making the United States more competitive in international trade, but is not consistent with the global public interest in economic growth, labor and capital investment. This policy was established under the UN General Assembly Resolution 8/91 in order to promote economic growth and employment. This policy has been controversial and some have called for U.S. participation. In order to have a public investment program to achieve a long term growth track, the USA has taken the first steps in the field of free trade, establishing its GPP and implementing its public investment program to encourage global trade. In fact, these countries have already taken a number of actions that reduce their own investment in free trade regimes, and the United States remains committed to taking advantage of them. In 2012, the United States created its own GPP to facilitate the adoption of this policy by the United Nations Organization of American States (UNOAS). This is due to the importance of the United States and its bilateral relationship with the countries that provide free trade benefits and investments in that respect as well as the need for them to adopt such policies.

5. US policy on access to the single market to achieve greater financial stability.

US government policies and actions in Central and Eastern Europe are well known in relation to the relationship of the European Union with Central and Eastern Europe. The United States has initiated a policy of the United States of America and its closest relations with them. In late December 2006, the United States initiated a programme by the United Nations General Assembly to establish an International Coordinating Council on Community and Social Issues (ICC), which would be led by the United States. The United States would initiate the process of adopting a new, open-ended economic policy and take measures to ensure that it achieves its obligations as a party to the agreement through such a process. The European Central Bank (ECB) has also established an independent group to review all Central European policy with participation from the member states. Since 1989, the United States has undertaken all of these actions.

The United States has also initiated a programme of the United States to establish a Comprehensive Economic Recovery and Reinvestment Partnership (CER) to provide for assistance to countries experiencing economic downturns, and to reduce the financial costs of fiscal austerity, particularly during current years. However, the American public has not accepted that such a program would serve the American public well and that the United States is taking similar actions in areas such as healthcare and education. Moreover, the United States seems to be making plans for the future of trade and investment. Since 2005, the U.S. Government is negotiating a bilateral trade agreement (BTTA) with the European Union (EU), and