A trade deficit occurs when the value of imports of goods and services is greater than the value of exports. For example, in 2016 the US exports totalled US$ 1,450,457 million. Imports totalled US$ 2,248,209 million. (WITS) Source: Trade balance at St Louis Fed. Since 1990, the US has run a persistent trade deficit. The …
Definition adjustable peg An adjustable peg exchange rate is a system where a currency is fixed to a certain level against another strong currency such as the Dollar or Euro. Usually, the peg involves a degree of flexibility of 2% against a certain level. However, if the exchange rate fluctuates by more than the agreed …
A floating exchange rate occurs when governments allow the exchange rate to be determined by market forces and there is no attempt to influence the exchange rate. Value of the Pound Sterling. The Pound devalued 25% in 2009, but the Central Bank/government made no attempt to intervene – interest rates were kept at 0.5% A …
A devaluation leads to a decline in the value of a currency making exports more competitive and imports more expensive. Generally, a devaluation is likely to contribute to inflationary pressures because of higher import prices and rising demand for exports. However, the overall impact depends on the state of the economy and other factors affecting …
Readers Question: What is the cause of deflation? Deflation involves a fall in the price level – a negative rate of inflation. From a very basic standpoint, there are two main potential causes of deflation: A fall in aggregate demand (AD) A shift to the right of aggregate supply (AS) – i.e. lower costs of …
The real effective exchange rate measures the value of a currency against a basket of other currencies; it takes into account changes in relative prices and shows what can actually be bought. Sterling effective exchange rate index. Nominal exchange rate The nominal exchange rate measures the current value of a currency against another. For example, …
The exchange rate is the rate at which one currency trades against another on the foreign exchange market If the present exchange rate is £1=$1.42, this means that to go to America you would get $142 for £100. Similarly, if an American came to the UK, he would have to pay $142 to get £100. …
Under certain circumstances, the government might want to intervene in the foreign exchange markets to influence the level of the exchange rate. Methods to Influence the Exchange Rate Reserves and Borrowing. If the value of an exchange rate is falling and the government wants to maintain its original value it can use its foreign exchange …