byeve__ (student)
International BaccalaureateEconomics
Eva Lamadé October 2012
IB Economics Hall
Advantages and Disadvantages of High and Low Exchange Rates & of a Fixed and Floating Exchange Rate System
1.An exchange rate is the price of one currency expressed in terms of another. If the U.S. exchange rate for the Canadian Dollar is $1.60, this means that 1 American Dollar can be exchanged for 1.6 Canadian dollars.
With a high exchange rate, there are many advantages: Imports become relatively cheaper. For example the price for imported raw materials becomes cheaper; the cost of production for firms becomes less. This could lead to decreased prices for consumers. The lower price of imported goods also puts pressure on domestic firms to keep prices low. All this leads to a downward pressure of inflation. Furthermore, more imports can be bought. A high exchange rate means that for each unit of the currency, more units in foreign currencies can be bought. Therefore there will be more visible imports, such as technology, and invisible imports, such as foreign travel. Moreover, a high value of currency forces domestic producers to more efficiency as they will try to remain their competitiveness. This would lead to greater economic productivity of the country. Yet, a result might also be the laying-off of workers. As visible, there are also disadvantages to a high exchange rate. Export industries might be damaged. Domestic companies will find it hard to sell their products abroad due to their relatively high prices, which could lead to unemployment in these industries. There also might be damage to domestic industries. As it is cheap for households to consume products from abroad, domestic industries might find that the demand, defined as the quantity of goods and services that consumers are willing, and able to buy at each possible price over a given time period, for domestic product falls. A result of this might be further increase in the level of unemployment, defined as the people of working age, those in the labour force, actively seeking work at the current wage rate but cannot find one, as firms cut back.
Possible advantages of a low exchange rate involve the greater employment in export industries as exports become relatively less expensive. Furthermore, domestic companies might experience greater employment as the low exchange might encourage consumers to spend more on domestic goods and services, rather than importing goods and services. This might also raise employment. A possible disadvantage of a low exchange rate is inflation, defined as the sustained increase in the general or average level of prices. Imported final goods and services, raw materials and components become more expensive. The cost of production for firms will rise, leading to a raise ...
