What are the main differences between a world economy in which exchange rates are set by governmernts and one in which exchange rates are determined by market forces

EXCHANGE RATES

2005

Exchange Rates

I . Introduction

It is a common business practice to witness countries tries to make an impact on the export market in an attempt to expand their industries beyond their limited local markets . However , when companies deal with foreign exchange for the payment of their services , they are therefore taking the risk of undulating exchange rate

In business , it is usual to see that such companies include their gain /loss from foreign exchange in their annual reports . It is desirable if the companies obtain gain

from the exchange rate but many of them undergo huge losses from it

In the Global Economics Game , I see that there is the power and influence of a central bank to intervene in the foreign exchange market to either appreciate or depreciate a nation 's currency

If the central bank decides to depreciate its currency , its exports will increase and our imports will decrease . This situation will cause the country 's economy to grow faster , but prices will rise . In contrast , if the country decides to appreciate its currency , the situation will cause the decreasing export volume and favor the imports to rise . This is what I call as a game since in business , I witness that there should be trade-off to take benefits of a particular occasion

Concerning the issue of exchange rate , in this , I will discuss the difference of a world economy that its exchange rates are set by governments and the economy that its exchange rates are determined by market forces . Prior to the discussion , I will provide brief understanding about what exchange rate means

II . Exchange Rates in Economy World

According to Geoff Riley (1998 , exchange rate is the value of a currency in terms of what it can buy of other currencies on the foreign exchange market

A rate of exchange is having important role in to getting monetary stability and supporting economic activity . Stable exchange rate is needed to produce advantageous climate for the development of business world activity

The undulating exchange rate suggests that there are some determinants that set the currency rates . In mid 1990 's , most Asian countries such as South Korea , Singapore , Malaysia , and Indonesia have undergone financial or monetary crises that forced each country 's currency to hit the lowest value in the countries ' history . There are two kinds of determinants of exchange rate as follows : exchange rates set by government and by market force

II .1 . Exchange Rates set by Government

To keep exchange rates fixed , there are two ways that government can do . First , which has been common in less-developed nations , is called a fixed and unconvertible exchange rate because the exchange rate is fixed . However , the domestic currency cannot be freely converted into foreign money . Governments using it almost always set the price of foreign exchange below the market-clearing price (which means that they price their own currency too high , and thereby cause a shortage of foreign money ( Government Policies toward the Foreign...