Create a new account

It's simple, and free.

International Economy Relationship

. Of great significance in the decision by a country to peg or float its foreign currency exchange rate is the relationship of that country to the international economy. If a country is not heavily dependent on the international economy in the context of either imports or exports, then that country could afford to consider pegging the foreign exchange rate of its currency. When imported goods are not a major factor in a country's economy, that country need have little fear of the transmission of price inflation from the international economy into its domestic economy. Further, when exports are not a major factor in a country's economy, that country does not need to worry about the effects of price inflation in its own economy on its export trade.

Under a floating exchange rate system, the international transmission of inflation is typically more difficult than under a fixed exchange rate system. When prices are raised in one country, the demand for that country's exports will, other factors remaining unchanged, diminish and, along with that diminishing demand, the demand for that country's currency will also diminish. As the demand for the currency diminishes, the international exchange value of the currency will also diminish. When the international exchange value of the currency has diminished sufficiently, the demand for the country's exports will then increase; however, the decreased value of the currency will prevent a transfer of the higher prices to the importing countries. Thus, the floating exchange rate system is an advantage to the country heavily dependent on international trade. 2. Under a floating exchange rate system, the balance of payments adjustment process depends on changes in the foreign exchange value of currencies to maintain an equilibrium in payments balances. As an example, assume the equilibrium price of the U.S. dollar in terms of Japanese yen is 121 yen. An increase in American demand for Japa...

Page 1 of 8 Next >

More on International Economy Relationship...

Loading...
APA     MLA     Chicago
International Economy Relationship. (1969, December 31). In LotsofEssays.com. Retrieved 05:56, March 29, 2024, from https://www.lotsofessays.com/viewpaper/1684152.html