I. INTRODUCTION
Objective
The general objectives of this study are to describe recent trade problems and examine why these problems are related to, and affected by exchange rates. The study first examines the exchange rate and how it is determined. The study will explore, in detail, the agencies that determine these rates. This study will also present the pros and cons of different prices of goods and services in different countries. Specifically, this paper:
(1) defines recent trade problems and how they are affected by the exchange rate;
(2) describes the steps taken within the agencies that determine the exchange
rates;
(3) examines the impact of these rates, both good and bad;
(4) analyzes the costs of similar goods in the U.S. and in foreign markets;
(5) discusses the pros and cons of the exchange rate and how it affects trade;
(6) examines various exchange rate systems: floating, fixed, and dirty floating.
Limitations of the Study
The topics of exchange rate and trade both have a variety of factors that cause changes. As with any study that attempts to explore current developments in the economy, it is hard to keep information current. It is also virtually impossible to report on the status of every single government that is involved in the exchange market. One of the limitations of this study is to report on up-to-date values of currency while choosing a sample of governments that accurately represent the world economy. Therefore, the solution was to use stastical figures from magazine articles and books that were written within the previous year. Also, the countries that were chosen to be studied are considered to play a significant role in the exchange rate market.
Plan of the Paper
This study first examines the relationship between the exchange rate and trade. This examination includes a definition of the exchange rate, an explanation of how the rate is determined, and a detailed description of the agencies involved in determining the exchange rate, including the United States Treasury and the Federal Reserve Bank (the
Fed). The next section defines and evaluates three different exchange rate systems - the
fixed, the floating and the dirty floating. The third section defines trade problems, how
they are affected by the exchange rate, and also how trade is affected by the ex...
... middle of paper ...
...e have been system changes in the United States, from the Bretton Woods to the present floating rate; and there are differing systems that are implemented
throughtout the world, the fact remains that the exchange rate is the basis for an amazing amount of financial decisions - including trade. Economists will argue over which system is best, but there is not doubt that whatever system is chosen will still have to be able to withstand the constant fluctuations in supply and demand. In the past few years, the world has seen supposed stable markets plummet after an overvaluation of their currency. Brazil and Russia are just a few of the countries that were affected - Mexico, Asia,Thailand, Malaysia, the Philippines, and Indonesia are other countries who have had to overhaul their exchange system.
Right now the dollar remains strong. However, the plight of these countries not only
creates an internal crisis, but it creates a small amount of panic throughout the world.
Investors who are cautious become concerned and quickly shift their investments. This
movement creates a domino affect through the exchange rate, interest rates, and trade
balances between countries.
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