NOTE: Free essay sample provided on this page should be used for references or sample purposes only. The sample essay is available to anyone, so any direct quoting without mentioning the source will be considered plagiarism by schools, colleges and universities that use plagiarism detection software. To get a completely brand-new, plagiarism-free essay, please use our essay writing service.
One click instant price quote
Exchange Rates and Their Affect on Trade 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 (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. 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 statistical 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. 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 exchange rate. Finally, this study analyzes foreign cost in terms of the costs of similar goods in foreign markets and how similar costs are possible. The foreign exchange rate is the price relationship between the currencies of two countries. How the exchange rate is determined, the agencies involved in determine the rate, and different exchange rate systems are outlined throughout this paper. The exchange rate is determined by the supply and demand of services traded between countries. Various agencies monitor the rate and intervene when needed, in order to counter disorderly market conditions.
Intervention involves buying dollars and selling foreign currency, coming from th Exchange Stabilization Fund (ESF) of the Treasury, to support the dollars price against another currency. Conversely, the Fed will sell dollars and buy foreign currency to increase the strength of the dollar. The United States Department of Treasury, the Federal Reserve, and central banks are the primary agencies that become involved if intervention is needed. 1 Although the U. S Treasury has been assigned primary responsibility for internation financial policy by Congress, the Treasury usually works alongside the Federal Reserve System when deciding to intervene.
These interventions do not occur often. Rather, they are implemented as an attempt to shift supply and demand on a long-term basis. Agencies Involved in Determining the Exchange Rate The Federal Reserve Bank and the United States Department of Treasury are primarily responsible for keeping records on the Balance of Payments, which relates directly to the determination of the exchange rate. These agencies are responsible for keeping track of the flow of money that is used to purchase merchandise, securities, and services, as well as payments made to other countries by the United States. In addition, these agencies are responsible for determining when to intervene in the Balance of Payments and the Exchange Rate The most important factor in determining the exchange rate is the Balance of Payments, which is an accounting record of all international transactions for a particular country during a specified time period. The Balance of Payments is figured using two primary accounts: the current account and the capital account.
The current account is further subdivided into four accounts: Merchandise Trade, Services, Income Receipts, and Unilateral Transfers. The Capital Account is also further divided into four accounts: Direct Foreign Investment, Portfolio Investment, Bank Related Flows, and Official Reserve Transactions. In theory, the current account and the capital account should balance and the sum of the balance of payments should be zero. However, due to statistical discrepancies, accounting conventions, and exchange rate movements that change the recorded value of transactions, the balance is typically a deficit or surplus. Some of the factors that can affect the Balance of Payments occur when, for example, the United States buys more goods and services than it sells, and must finance the difference by borrowing, or selling more capital assets than it buys. Any transaction that causes money to flow in or out of a country is included in the Balance of Payments.
Because the exchange rate is determined by the supply and demand of a countrys currency, it is directly related to the Balance of Payments. To help clarify the format for which the Balance of payments is determined, the 1993 U. S. Balance of Payments statement is included on the next page. In 1944, a group of representatives from throughout major industrialized countries, met in Bretton Woods, New Hampshire and established the fixed rate exchange system, known as the Bretton Woods Account. This system was developed as an entirely new international financial system as an attempt to curb fluctuations in currency values.
The exchange rates were fixed using the U. S. dollar as the official reserve currency, and a countrys central bank had to buy or sell supplies of its currency using dollars, in the event that the exchange rate strayed from the pre-determined rate. 2 The Bretton Woods fixed exchange system stayed in effect until the early 1970 s, when it collapsed and was replaced with the floating exchange rate. This system did not impose a pre-determined exchange rate. Instead, the exchange rate is allowed to change and fluctuate as individuals, businesses, banks, and governments buy and sell the currencies of other countries. This creates a rate that is constantly changing - not only by the day or The floating exchange rate can be further divided into two forms: clean or dirty floating.
Clean floating refers to a rate in which the central bank does not intervene to affect the exchange rate. Dirty floating, which is more commonly practiced than clean floating, involves intervention from the central bank to influence the exchange rate. One of the advantages of a floating exchange rate is that although an internal crisis is possible, there will never be a foreign exchange crises. 3 As mentioned earlier, when the Bretton Woods system failed, the United States established a floating exchange rate, although many economists feared that a floating rate would be harmful to the operation of international trade. A floating rate was viewed as highly unstable and it was thought that the indirect effects of this instability would limit stimulation of trade. Without stability in trade, the supply and dema...
Free research essays on topics related to: supply and demand, bretton woods, balance of payments, united states department, federal reserve bank
Research essay sample on Exchange Rates And Their Effect On Trade