Currency, like any other commodities, has a price, and sterling or Great Britain Pound (GBP) is no exception. Obviously, the price of the pound has depreciated against the US dollar during a long term, but it has appreciated against the US dollar over a short period of time. Indeed, according to the World Bank Data (2010), GBP price dropped slightly against that of the USD from 1.65 on September 1st 2009 to 1.55 on August 15th 2010. However, this survey also reveals that the price sterling to dollar has risen steadily between1.45 and 1.55 since last month. So, what causes the fluctuation of the GBP nominal exchange rate has provoked a heated discussion. The purpose of this essay is to explore the determinants of sterling nominal exchange rate and forecast its future trend. Firstly, it will give definition of nominal exchange rate compared to real exchange rate. Secondly, three factors that decided the GBP nominal rate of exchange will be analyzed. Finally, it will predict the future tendency of sterling exchange rate in accordance with the determinants.
It is common to classify the exchange rate into two types, nominal exchange rate and real exchange rate. Nominal rate of exchange defined as the value of the domestic currency in relation to a foreign currency without consideration of the inflation rate (Piana, 2001). Similarly, as Basak and Gallmeyer (1998) maintained that nominal exchange rate is expressed as number of units of home currency that can purchase a unit of another currency. For example, if the nominal exchange rate between the GBP and the USD is 1.55, then one pound will purchase 1.55 dollar. By contrast, real exchange rate takes inflation into consideration, which reveals how much the goods and services in the ho...
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...inal rate of exchange will rise slightly in the future.
Works Cited
Basak, S. & Gallmeyer, M.(1998) Currency Prices, the Nominal Exchange Rate, and Security Prices in a Two-Country Dynamic Monetary Equilibrium, Unpubished paper Weiss Center for International Financial Research, Wharton School
Fieleke, N.(1999) ‘What Is Balance of Payment’, Survey of Current Business, July 1999, pp.60-74
Piana, V.(2001) ‘Exchange Rate: A Key Concept in Economics’, at: http://www.economicswebinstitute.org/glossar/exchrate.htm
Drab,B.(2005) Deterniments of Nominal Exchange Rates, Unpublished paper, International Financial Management, Harvard Business School, U.S.
Chinn,M.(2006) ‘Real Exchange Rate’, National Bureau of Economic Research, February 4, 2006
World Bank Data (2010), at: http://search.worldbank.org/data?qterm=gdp%20exchange%20rate&language=EN&format=html
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