The paper "Fixed and Floating Exchange Rates" is an outstanding example of a finance and accounting coursework. An economy which has strong roots and resources contributes to the growth and well being of people. The growth rate of an economy is depicted by the GDP and per capita income. Many factors contribute to making an economy successful. Some of these factors are agriculture, infrastructure, exports, and production as all this contribute towards the growth. Exports form an integral part of GDP and economies want to have a higher share in the world market.
Dealing with other economies through export and import raises the mechanism of foreign exchange. Economies have to pay the other economy in their local currency which makes exchange rate important. The paper thus looks into the two types of exchange rate prevalent and the benefits drawn from each. It also looks into the manner international business is conducted and the effective exchange rate has on world economies. Foreign exchange is “ a mechanism through which two countries adjust their balance of payments through different instruments” . (Scott, 2006, pg 3) An economy transacts with the other and needs to pay for the goods or services consumed.
Foreign exchange is a mechanism through which economies pay the other country. Foreign exchange is thereby measured through fixed and floating exchange rate which determines the value of the currency. Both these mechanisms are important and help the economy in a different manner. There has been a shift towards floating exchange rate and few economies like China still practices a fixed exchange rate. A descriptive analysis of both the fixed and floating exchange rate is provided. The fixed Exchange rate is the “ exchange rate between currencies which has been fixed by the government and is not allowed to change by the supply and demand function for the currency” .
(Fixed Exchange Rate, 2010, pg 1) This type of exchange rate is slowing vanishing and few economies like China uses the fixed exchange rate. In this rat, the government fixes the value of the currency against certain currency or against gold. The government ensures that the sufficient amount of currency or gold is kept with the Central Bank and measures are taken so that the value of the deposits doesn’ t fall as it can affect the exchange rate.
(Grilli, 2004, pg 147) Fixed exchange rate requires the government to be active and take all necessary steps to ensure that the exchange rate doesn’ t fall below a certain level. If this happens then the government has to use its reserves to ensure that it purchases the currency which will drive the demand for currency and help to achieve the desired level of exchanges. (Fixed Exchange Rate, 2010, pg 1) Thus government intervention becomes very important and all measures should be directed towards it. A study in this direction shows that “ government is forced in a vicious circle when it tries to ensure the value of the currency by raising the nominal interest rate” .
(Bensaid & Jeanne, 1997, pg 1467) This increases speculation and creates a situation where controlling the value of the currency results in increased speculation and managing the fixed exchange rate becomes difficult. Fixed Exchange rate helps the economy in a number of ways due to the inherent benefits it brings along with it.