Exchange Rates Between The Chinese Yen And U.S Dollar. (Essay Sample)

Exchange Rates Between The Chinese Yen And U.S Dollar. BRENDA O. OSEBE. Department Of Economics, School Of Business What Should Be The "True" Exchange Rate Between The Chinese Yuan And The US Dollar? The Chinese economy has also expanded rapidly over this period, and it is predicted that with a growth of 8 percent in real GDP (the GDP-Gross Domestic Product) by fiscal year 2008. With an expansion rate higher than 15% per annum to 2010, China’s real GDP will exceed its GPD by 2014, which means that the pace of economic development is much faster than any other country within the region. The government plans to spend 20 billion dollars on infrastructure by then. In addition to these improvements, China has been making significant progress on the labor market. According to Pankaj Mishra, President of the Reserve Bank of India, “the average annual increase in labor force participation rate [from 2004 to 2005] was almost 10 percentage points higher in China than worldwide.” It is interesting to notice that there are numerous differences between the US dollar and the Chinese yuan. These are not purely cultural or monetary. However, they include important characteristics of the international trade and financial system. It would be best to compare them to see if there is anything similar to take as a sign, or perhaps even more likely, the reason why the United States may be at risk of having their currency devalued. I am going to focus on three main areas of difference, including the exchange rates, foreign exchange reserve balances, and bank reserves. To discuss each of these, it is necessary to examine the major world economies to determine how the currencies are performing and how they might react to any changes in the exchange rates. The International Monetary Fund (IMF). This organization manages the international monetary systems of most countries around the globe. They have set aside $4 trillion for lending and borrowing to help in stabilizing global capital flow, especially in times of crisis. One area where there is considerable disagreement, however, is about the amount of loan the IMF should lend to individual nations. For instance, some economists believe that the agency should provide loans up to 75% of national budget revenues whereas others advocate a 25% limit at a minimum. As a result, the IMF provides interest income to member states, but no equity or debt. If one were to compare this system to that used in developing countries, it seems clear that most nations would prefer less direct support. Thus, in spite of all these differing opinions about what the IMF can do for member countries, the goal is always the same: to stabilize the macroeconomic and maintain financial stability as well as to preserve an ample level of financial discipline in developing countries. When combined with other factors like corruption, low standards of living, and high levels of poverty, many argue that the IMF has not done enough to develop these nations. Nonetheless, it must be considered in comparison with the United Sates since it is already operating under a democratic rule system. On top of providing loans, the IMF assists member countries in reducing inflation, improving their balance sheets and controlling unemployment and underemployment, and building up strong macroeconomics for sustainable long-term growth. The Foreign Exchange Rates. Because most economies depend upon foreign commerce, the value of money in circulation in an economy plays a key role in determining the state of economic activity. Even though in certain instances this relationship is complex, exchange rates have generally played an integral part in the control of these economies. Since the 1990s, the exchange rates between both the domestic and foreign currencies have fluctuated significantly, causing a rapid change of values within the two of these markets. In fact, while the prices of goods and services have remained relatively stable, the fluctuations between the different currencies have caused dramatic swings in the exchange rate. Generally speaking, the most difficult aspect of predicting exchange rate changes will often come when analyzing the impact such shifts might have on either domestic or foreign economies. Due to these variables, the forecasters are usually faced with more difficulty when trying to predict exchange rate movements in domestic markets than those outside the country. In order to evaluate this problem, banks or exchange houses must consider several crucial elements. Firstly, for each currency there must be a supply and demand for that currency. Secondly, once the exchange rate is determined, a number of factors need to be researched. Among these are the cost of converting the currency into another asset like a U.S. Treasury bill, the price elasticity of the other currency relative to U.S. Treasuries, and, finally, the extent of the effects of changing the local currency on imports and exports, among other things. When examining whether there can ever be a true positive correlation between the Chinese Yuntian or the American Dollar/Yuan or the Japanese Yen/Yen, it is difficult to say definitively which country is most likely to experience the greatest appreciation in its currency against the other. All of the above-mentioned aspects play into the equation as the three countries are very closely related. In fact, according to information obtained from official sources from China, approximately 40% of total exports go out of the nation. This makes the currency extremely valuable by other Asian countries. At the other end of the spectrum, Japan has some difficulties with importing raw materials because of high tariffs. From this point of view, it is understandable why Japan and China are currently competing for dominance for various commodities. However, based on overall exports, China produces far more commodities than Japan does. As a consequence, the purchasing power parity for china is considerably higher than that of Japan. Consequently, the value of china currency has increased compared to Japanese yen. Not only are Chinese goods cheaper than Japanese products, but more importantly, they offer a greater degree of freedom to consumers, allowing them to choose between the varied forms of consumption. Therefore, the rise of the Chinese Yen against those of Japan and America in respect to oil prices is undoubtedly an indication that the depreciation of the American Dollar is being felt. The biggest criticism of this argument is that one cannot be sure who was responsible for introducing new regulations to boost production and export rates in china. Similarly, for Japan the introduction of deflationary policies was introduced to try to reduce its dependence on imported resources. Both these countries have had major impacts on the movement of goods between themselves due to the existence of a large demand for their own currencies. The shift in these relationships is a great indicator that there is something different happening in both countries as evidenced by the current developments. The Main Factors That Have Made The Chinese Dollar Lose Its Value Over Time Because the main factor causing the decline in the value of the Chinese Dollar is the growing competition against American products with regards to manufacturing industry, we will first examine this factor. Initially, after the fall of the Bretton Woods System (BWS), the USD was heavily dependent on industrial metals like copper, nickel, and tin, which accounted for 70% of the total product. Then, a new commodity was introduced, namely computer chips. Within a few years, the United State began to import computers in record numbers. Other sectors of industry were affected as well, specifically softwar...