Small Successful European Economies - Essay Example

since the comparison is calculated as a difference of the unadjusted weighted averages, the exchange rate can either be positive or negative. A nominal exchange rate greater than 1 signifies that the currency of the home country is worth more than the foreign currency against which it is being compared. Any value below 1 would be the opposite. Such a calculation enables consumers to determine the relative price they pay for an imported good and helps them determine whether their spending is worth more or less for the imported goods in comparison to the local currency.

The Danish economy, which was agrarian in nature until the 1970s and had been facing problems with restrictions by the EEC members, could not afford to take advantage of a high growth period during the 60s. since then, the contribution of the services sector including segments such as construction and shipping has grown much more in comparison to the contribution from agriculture. Even manufacturing took a backseat with a large part of the workforce being employed in the services sector as manufacturing, which was dependent on international exports faced stiff competition.

As such, this decade started to witness a marked increase in the number of companies that could thrive internally and the relevance of companies that were dependent on doing business with external entities began to diminish. This was also the time when Denmark joined the European exchange rate cooperation and the higher rate of inflation that was a result of the severe stress put on the Danish economy resulted in a negative nominal exchange rate. The marked spike in public spending combined with a squeeze on international exports also contributed to the low nominal exchange rate in comparison to the later years.

The real effective exchange rate is a weighted range of an economy’s currency in comparison to the collective index of major traded currencies after adjustments for the effects of inflation. These