Global Economic Issues
Assignment
Exchange Rates
Question 1
Explain 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 2
Over the past 50 years, the world has moved away from fixed exchange rate systems towards a freely-floating exchange rate regime. Explain ...