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Foreign Exchange - Essay Example

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Some think the current system of managed but floating rates is too unstable. What would generate the instability? The Bretton Woods system is a landmark system designed for monetary exchange rate management that came to play in 1944…
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Foreign Exchange Question How did the Bretton Woods system operate? What caused its collapse? Some think the current system of managed but floating rates is too unstable. What would generate the instability? The Bretton Woods system is a landmark system designed for monetary exchange rate management that came to play in 1944. The Bretton Woods agreement was developed in New Hampshire in 1944. The major outcomes of the agreement were the formation of an International Monetary fund. The system proposed the introduction of a pegged foreign monetary exchange rate system that was adjustable. Under the system, other than U.S, other countries central banks were assigned the task of maintaining a fixed exchange rate between the dollar and their respective currency. This would be done by intervening in the market of foreign exchange. The system lasted up to 1971. Inflation in the U.S and the trade deficit were undermining the dollar value. The U.S abandoned the system allowing the dollar to ‘float’ instead of fixing it. The current system is stable as it provides for variables like trade deficits and inflation. The dollar is fived by the markets. However, depreciation, which causes a rise in prices in the domestic markets, will destabilize the system. Question 2: What is foreign aid and what is the goal of foreign aid? Does foreign aid promote economic development? Explain briefly Foreign aid is described as the international transfer of services, goods, or capital from an international organization or country for the benefit of another country (McEachern, 2012). Foreign aid can be in form of military aid, humanitarian aid or monetary aid. The goal of foreign aid is to help countries in need to increase their capabilities of achieving their goals. Foreign aid is intent on helping countries receiving help improve their ability to be secure, defend their borders, or improve trade. To some extent, foreign aid does promote economic development. Countries like South Korea and Taiwan have grown economically backed by foreign aid. Foreign aid will mostly come with conditions, goals, and projections. This means that aid must be utilized to achieve goals set. In a majority of cases, it is given for development projects that stimulate economic development. Foreign aid will also free up some of the countries spending and it can be directed towards development projects. Question 3: Why can’t all the balance of payments accounts be in surplus? What factors determine the demand for British pounds in foreign exchange markets? How are exchange rates determined under a flexible exchange rate system? Imbalance in a country’s balance of payments is caused where payments a country makes are less compared to those received. This is what that is termed as a favorable balance of payment. However, there are consequences caused by factors like production, unemployment, and inflation. A balance of trade surplus is the cause of balance of payment surplus. However, other payments will turn a balance of trade surplus to a deficit. This means not all balance of payments accounts will be surplus. The British pound will be influenced and determined by a number of factors with respect to the foreign exchange markets. If the British inflation is relatively low, exports will be more competitive driving up the demand for the pound. If the British interest rates raises, relative elsewhere, Britain becomes more attractive to deposit. This will increase demand for the pound. Demand will also be determined by balance of payments, government debt, and relative strength of other currencies. Question 4: How can two countries both be better off as a result of trade? How can tariffs protect U.S. Jobs? Do tariffs lead to a net increase in jobs? Explain. Who are the winners and losers from trade restrictions? Give that trade restrictions impose losses on an economy, why are trade restrictions so common? Countries will be better off as a result of trade if they use it to enhance domestic competitiveness. Competition will result in production of higher quality goods. Countries are also better off if they take advantage of technology brought about by international trade. Increases in sales and profits are beneficial to countries. Countries also reap from gaining a global market share for their goods and services. The creation of a competitive advantage for domestic and foreign manufacturers is a violation of the principle of the U.S trade agreements with other countries. Tariffs are an effective tool to adjust market price of goods that are imported. This discourages exportation of jobs to cheaper markets, thus, eliminating other countries competitive advantage. Tariffs hurt and are of advantage most to the country that imposes them. Tariffs will result in increased government revenues, in turn benefitting the economy. A healthy economy translates to a net increase in job creation. Consumers and foreign producers are the losers from trade restrictions and tariffs (Bade & Michael, 2002). The government is the major winner as it increases its revenues. Trade restrictions are there to control the market and protect the country’s interest and economic gain Question 5: Describe developing countries and how they differ from industrial market economies. How can international trade aide development? In what ways does the international economy impose problems on developing countries? Developing countries are the countries that do not possess the high-level development structures in place in terms of infrastructure, industrialization, and Per capita income. Developing countries when compared to developed countries (industrial market economies), have low per capita incomes, and are below per in terms of economic and political stability. International trade will aid development in developing countries by way of increasing revenues and resources that are achieved (Bade & Michael, 2002). Good foreign relations aid and result in free trade. Developing partners benefit from this and attain trading friends. Developing countries continue to incur huge debts because of loans granted by developed economies in the international economy. This means that as much as they continue to benefit, these countries will always have a debt crisis to deal with in the long term REFERENCES Bade, R. & Michael, P. (2002). Foundations of Microeconomics, Boston, MA: Addison-Wesley McEachern, W.A. (2012). ECON Macro 3 (3rd ed.), Mason, OH: South-Western Read More
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