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Exchange Rate Policies - Essay Example

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Nations try to achieve comparative advantage through various means such as technology, just-in-time logistics and many more. Exchange rate is one of the many ways that country can use to their advantage in…
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Exchange Rate Policies
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Exchange Rate Policies

Download file to see previous pages... Above balance of trade in favor of China says a lot about the comparative advantage that China has in a vast array of goods. Moreover, the pertinent point is that China has successfully tilted the advantage in its favor through a managed exchange rate regime. It is of no surprise that China has accumulated over $3trillion in its reserve through this comparative advantage in trade.
A couple of years back, China had pegged its currency Yuan at about 8.28/dollar and that remained at that level fairly for a long time. China transited to a ‘managed float’ in 2005 but till date it has refrained from ‘free floating’ Yuan. China does so because it does not want to see its currency appreciate against dollar. In doing so, China may lose the comparative advantage that it has gained across a wide range of goods.
The U.S. is passing through a dire recession and unemployment rate continues to hover around 9 percent for last several quarters. There is no denying to the fact that the U.S. industries are at great loss so far comparative advantage is concerned. That is why economists like Krugman (2011) strongly advocates that a weak dollar is in the interest of U.S. to protect its producers. That is also a way to eliminate the U.S. trade gap with China providing a level playing field to the U.S. ...Download file to see next pagesRead More
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