You now understand the economies of the world use a free-floating exchange rate system. This system creates problems and benefits for anyone doing business outside their own borders. An interesting way to look at the difference in purchasing power of the USD (US Dollar) compared to other currencies is with the Big Mac Index (Links to an external site.). Be sure to read the footnotes at the bottom of the table. Notice the right-hand column gives the under/over valuation of that currency to the USD. Remember, this index is not an absolute measure, but it is a handy reference since Big Macs are available in every developed economy in the world. Use the index and a currency converter (like the one found here (Links to an external site.)) to understand the exchange rate.
Discussion
Find the currency of your home country and describe its value relative to the USD. If you are a U.S. citizen choose China, Japan, or the Eurozone (Links to an external site.) (a country using the Euro). Is it under or over-valued compared to the USD? What problems or benefits do you think this relationship might cause for your country? Why?
What problems or benefits do you think this relationship might cause for the US?
Governments often intervene (manipulate) in foreign exchange markets to give their currency a more favorable rate. Do some research on the web to see what intervention has occurred or has been discussed lately regarding your country’s currency
2. When a U.S. domestic producer begins selling exports, they typically need to worry about the foreign exchange market, since often the revenues an exporter earns are foreign currencies that then need to be traded into dollars. Because the foreign exchange value of the dollar tends to fluctuate, this adds an additional level of risk to the exporter’s business. What are some factors that would make a domestic producer willing to take on this extra and new type of risk?
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