The general objectives of this study are to describe recent trade problems and examine why these problems are related to, and affected by exchange rates. The study first examines the exchange rate and how it is determined. The study will explore, in detail, the agencies that determine these rates. This study will also present the pros and cons of different prices of goods and services in different countries. Specifically, this paper:
(1) defines recent trade problems and how they are affected by the exchange rate;
(2) describes the steps taken within the agencies that determine the exchange
(3) examines the impact of these rates, both good and bad;
(4) analyzes the costs of similar goods in the U.S. and in foreign markets;
(5) discusses the pros and cons of the exchange rate and how it affects trade;
(6) examines various exchange rate systems: floating, fixed, and dirty floating.
Limitations of the Study
The topics of exchange rate and trade both have a variety of factors that cause changes. As with any study that attempts to explore current developments in the economy, it is hard to keep information current. It is also virtually impossible to report on the status of every single government that is involved in the exchange market. One of the limitations of this study is to report on up-to-date values of currency while choosing a sample of governments that accurately represent the world economy. Therefore, the solution was to use stastical figures from magazine articles and books that were written within the previous year. Also, the countries that were chosen to be studied are considered to play a significant role in the exchange rate market.
Plan of the Paper
This study first examines the relationship between the exchange rate and trade. This examination includes a definition of the exchange rate, an explanation of how the rate is determined, and a detailed description of the agencies involved in determining the exchange rate, including the United States Treasury and the Federal Reserve Bank (the
Fed). The next section defines and evaluates three different exchange rate systems - the
fixed, the floating and the dirty floating. The third section defines trade problems, how
they are affected by the exchange rate, and also how trade is affected by the exchange
rate. Finally, this study analyzes foreign cost in terms of the costs of similar goods in
foreign markets and how similar costs are possible.
II. FOREIGN EXCHANGE RATE
Definition of the Exchange Rate
The foreign exchange rate is the price relationship between the currencies of two
countries. How the exchange rate is determined, the agencies involved in determing the
rate, and different exchange rate systems are outlined throughout this paper.
Determining the Exchange Rate
The exchange rate is determined by the supply and demand of services and goods...