Okay I have asked this question before but even economics professors give me a lackadaisical reply. Currently the British pound sterling is almost twice the dollar at 1GBP to 1.77 USD. That means that the British people are 70% richer than the U.S. What is rich and why the confusion? Ideally the people producing the most in terms of goods and services are rich, taking account that money equals to goods. The total amount of money in a society is ideally supposed to equal the goods and services in the same country. This divided by the population is the GDP. The U.S has the highest GDP but somehow is poorer than the British. Japan’s GDP also almost doubles the British at 3.8 trillion last year, while Britain’s GDP clocked 1.7. But this is not apparent in both countries currency as the Yen is almost 100 times cheaper than the Pound sterling. Can anyone explain to me?


http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29

What is the price of a one-room flat and how much does a fry cook at McDonald's make per hour?

Even though the answer above is a very good one, I will try to put some more meat on the bones.

The currency exchange rate has little to do with being richer or poorer. It is simply a way of measuring the value of "stuff" across borders.

A Big Mac in the us is $2.90, while in the UK it is about £1.9 which translates to about $3.40. So that puts UK price level a little above US. A minimum-wage job would then also pay a little bit more. If a brit goes to the US she would find the prices low.

Another example is Norway. 6.4 Norwegian Kroner is about 1 US dollar. That does not mean that americans are 6 times richer. The Big Mac is more than $5 in Norway.

This comes down to Purchasing Power Parity (PPP), or i.e. how much stuff you can purchase with an hour's salary.

http://www.economist.com/markets/bigmac/displayStory.cfm?story_id=2708584
This article explains the bigmac-index, a simple way of determining what countries have a high and low price level, comparing PPP.

GDP pr. person is a good measure of a country's wealth, but not the wealth of the people. In GDP pr person, the US is up at the top, but that does not help the poor people there.

I hope that helped a little.

Okay I have asked this question before but even economics professors give me a lackadaisical reply. Currently the British pound sterling is almost twice the dollar at 1GBP to 1.77 USD. That means that the British people are 70% richer than the U.S. What is rich and why the confusion? Ideally the people producing the most in terms of goods and services are rich, taking account that money equals to goods. The total amount of money in a society is ideally supposed to equal the goods and services in the same country. This divided by the population is the GDP. The U.S has the highest GDP but somehow is poorer than the British. Japan’s GDP also almost doubles the British at 3.8 trillion last year, while Britain’s GDP clocked 1.7. But this is not apparent in both countries currency as the Yen is almost 100 times cheaper than the Pound sterling. Can anyone explain to me?


http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29

The problem is that you're not looking at everything in the proper perspective.

The British people are certainly not 70% richer than the Americans! That's simply the exchange rate and in no way relates to "richness."

The true indicators are how much money people have on average (consider that some poor Brits have few pounds and many Americans have a lot of dollars, for example) AND just how much you can buy with an average hour's wages.

That last one defines the real prosperity of a nation.

“A Big Mac in the us is $2.90, while in the UK it is about £1.9 which translates to about $3.40. So that puts UK price level a little above US. A minimum-wage job would then also pay a little bit more. If a brit goes to the US she would find the prices low”.
No. That puts U.K price levels a little above U.S, at least in terms of big mac. But we are talking about a product of an American company. Anyway this is micro economy and the subject is not that relevant because I have seen burgers as high as 3.50 in the U.S also. Too many overtones in micro commerce.


“Another example is Norway. 6.4 Norwegian Kroner is about 1 US dollar. That does not mean that Americans are 6 times richer. The Big Mac is more than $5 in Norway”.

Yes that is because the big mac is an American company’s product and they need to recoup their appointed cost adjusted with the price of living in America. Different scenario for indigenous goods in Norway.


“This comes down to Purchasing Power Parity (PPP), or i.e. how much stuff you can purchase with an hour's salary”.
Yep but firstly it depends on the product and the origin of the product’s company. American companies selling abroad will always adjust the price to the respective needed level. And again the semantics. Before we even mention PPP why can’t we acknowledge the fact that those producing the best and most ought to be of higher worth?



“GDP pr. person is a good measure of a country's wealth, but not the wealth of the people. In GDP pr person, the US is up at the top, but that does not help the poor people there”
Common man rich people are the ones producing the most. There is a reason why MacDonald’s and their subordinates are richer than the down the road Jake’s burger. Besides I don’t understand how a country can be wealthy and its people are not, do the people not make up the country?


”The British people are certainly not 70% richer than the Americans! That's simply the exchange rate and in no way relates to "richness”

If I was a British man and came to America with 1,000 GBP I will find the price level relatively lower and I will be richer when it comes to indigenous goods and services in America. Same if I travel to China I will find the price of made in China cotton pillows cheaper. The reality is that money equals goods and services so the question is whether it’s about quality or quantity. If it’s about quantity then the U.S dollar should be stronger, but today’s exchange rates indicate that British goods and services are of way higher quality.

The last thing I want to say is that everything is equal until it comes to propaganda. I am also a stock broker and the only other thing that inflates values apart from earnings is propaganda, which comes in many different forms

“ “A Big Mac in the us is $2.90, while in the UK it is about £1.9 which translates to about $3.40. So that puts UK price level a little above US. A minimum-wage job would then also pay a little bit more. If a brit goes to the US she would find the prices low”. ”


No. That puts U.K price levels a little above U.S, at least in terms of big mac. But we are talking about a product of an American company. Anyway this is micro economy and the subject is not that relevant because I have seen burgers as high as 3.50 in the U.S also. Too many overtones in micro commerce.


Wow! You must be one heck of a broker! Since you don't pay attention to details. Someone makes a statement (as above) and you respond with "no" and then make the very same statement. :bugeye:

I actually saw the anormaly but I didn't want to say U.S prices where higher because I also considered the many factors in micro commerce. get it? Besides he is right on his observation

I actually saw the anormaly but I didn't want to say U.S prices where higher because I also considered the many factors in micro commerce. get it? Besides he is right on his observation

Ha! You can't wiggle out of it that easily. First you say no to him and now you say he's right.

Which is it? (This is economics, not politics, so you can't have it both ways at the same time.) :D

A Big Mac in the us is $2.90, while in the UK it is about £1.9 which translates to about $3.40. So that puts UK price level a little above US. A minimum-wage job would then also pay a little bit more. If a brit goes to the US she would find the prices low.

He is right because 3.40 is higher than 2.90. But this does not necessarily mean the minimum wage in U.K should be higher because some tom wants to buy macdonalds. If so then minumum wage jobs should be elevated for workers to be able to afford fish and chips here in the U.S. You see this is micro economics and they are also cheaper burgers in the U.K but I will make do with this notion regardless. Most macdonalds franchise owners in the U.K buy franchise from U.S and sell in acoordance to profit and living conditions in the U.K, which is relatively higher than the U.S. Higher because the money is of higher value, and we are back at square one, why is it of higher value? Thus we look at the macro aspect

No. That puts U.K price levels a little above U.S, at least in terms of big mac. But we are talking about a product of an American company. Anyway this is micro economy and the subject is not that relevant because I have seen burgers as high as 3.50 in the U.S also. Too many overtones in micro commerce.

Well, I assume the BigMac-index uses the average price of a Big Mac within a country. And it is used as a macro economics tool to simplify the understanding of PPP. Probably because McDonalds has a pricing policy that takes PPP into account.



Yes that is because the big mac is an American company’s product and they need to recoup their appointed cost adjusted with the price of living in America. Different scenario for indigenous goods in Norway.
...
Yep but firstly it depends on the product and the origin of the product’s company. American companies selling abroad will always adjust the price to the respective needed level. And again the semantics. Before we even mention PPP why can’t we acknowledge the fact that those producing the best and most ought to be of higher worth?

In the case of an exported good I can see how the cost level in the US comes into consideration, but in the case of a Big Mac, which is produced locally as part of a franchise, the local cost level would matter the most. I am not sure what you are trying to say with the last sentence, and neither how it is relevant in this discussion



Besides I don’t understand how a country can be wealthy and its people are not, do the people not make up the country?


Well, the US is generally considered the richest country in the world, with a very high GDP pr. capita. Still the US has a higher percentage of poor people than most western countries. That is because of the division of the wealth.
Another issue is national debt. How come the "richest" country in the world has the highest national debt in the world?



The reality is that money equals goods and services so the question is whether it’s about quality or quantity. If it’s about quantity then the U.S dollar should be stronger, but today’s exchange rates indicate that British goods and services are of way higher quality.

I believe you have misunderstood the concept of exchange rates. It is mostly a concept of supply and demand of a currency. It is affected by the interest rate, import, export and more.

...U.S and sell in acoordance to profit and living conditions in the U.K, which is relatively higher than the U.S. Higher because the money is of higher value, and we are back at square one, why is it of higher value?

Really? No, those are incorrect statements.

The problem is you have a hang-up on exchange rates and that does not determine what you are looking for.

Consider this. Let's say you formed your own country and established your own moneatary policy and set your currency to one unit to equal $500 USD. Does that mean that you and your people are now 500 times richer than an American? It would according to way you're tying to view it. But that's totally wrong.

Simple question for you - do you understand what exchange rates are all about anyhow?

Really? No, those are incorrect statements.

The problem is you have a hang-up on exchange rates and that does not determine what you are looking for.

Consider this. Let's say you formed your own country and established your own moneatary policy and set your currency to one unit to equal $500 USD. Does that mean that you and your people are now 500 times richer than an American? It would according to way you're tying to view it. But that's totally wrong.

Simple question for you - do you understand what exchange rates are all about anyhow?

Richness is all about buying low and selling high. And if you can't sell high enough develop a leverage by making a shit load enough to make up. You see none of you have looked at my perspective instead of using semantics to circumvent the issues. Well if you go to China with 1000 dollars will you not find made in china goods cheaper? Of cause you may prefer to buy multinatinal goods like sheraton hotel and macdonalds but that is your own choice. Anway is that not what I call rich? 8 times richer to be exact. And yes if I formed my own country and I visited U.S I will be 500 times richer because I will have a very high purchasing power. Lets say the whole world had currency of equal value and lets consider why some may have a higher currency than some. Lets take western europe, if a country called France produced more goods than Italy they will have the capacity to export. By this time France has a better employment rate, better living standards and general stability, and a good financial result as do a company. Italy on the other hand does not produce as much as France and ain't doing as well. Because of this Italy is inflated and their money is of relatively leseer demand, unless the few goods produced in Italy are of ridiculously high quality will the currency pary with the French. Like I said its all about quality or quantity. Bck to the real world, Lets not forget that the industrial evolution started in England, which propagated their rise in living conditions and value as compared to other countries. So what makes a currency higher? As do anything it is essentialy deman. As long as you can keep up the demand, even artificialy, you can circumvent any problems. But credit to whom credit is due, thats another issue that does not belong to the papers

Richness is about having resources. If you have many resources, not only natural, and you can apply them to fulfill a demand, you are rich. That has absolutely nothing to do with an exchange rate. The earlier exchange rates were based on the gold standard. A certain amount of currency for a bar of gold. As a currency would be higher in demand, it would increase in value. They did not all start at 1:1. One Norwegian krone has always been able to buy less gold than one british pound. That does not mean that a norwegian is poorer. The Norwegians simply have a higher number in our pricetags than the Brits for goods of the same value. There is also a difference in price levels, which means that a Big Mac or a book would be less expensive in the UK than in Norway. Since the salaries also are higher, it may, for two burger cooks take the same amount of time to earn enough to buy the book, even though the Norwegian cook earns more money.

I agree with some of your statement, it just seems that you have some difficulty separating PPP, exchange rates and richness.

Well, the US is generally considered the richest country in the world, with a very high GDP pr. capita. Still the US has a higher percentage of poor people than most western countries. That is because of the division of the wealth.
Another issue is national debt. How come the "richest" country in the world has the highest national debt in the world
GDP is the total goods divided by the population, what this just says is according to the papers America is rich. Real life is a tard different as we all know. I



I believe you have misunderstood the concept of exchange rates. It is mostly a concept of supply and demand of a currency. It is affected by the interest rate, import, export and more

I have heard all that before but they still do not circumvent the fundamentals. Exactly which begs the question where does a corporation stop and a nation begins. As far as I can remember America and its land is better desired than any other place. Many people would rather do business in America than many other places. In fact many transactions are officially in dollars. To make everything clearer let’s consider the official market as also a black market, just supervises by “officials”. To make money in any market you have to buy low and sell high and you have to be able to not only produce but add value to your product, all these has to be done regardless of market conditions. The reality is that those producing the most ought to be of higher value. It’s a no brainier. Debt, interest rates, all those things don’t really matter. Is the same heavily in debt U.S currency not of higher value than a hundred other countries? Then why? On interest rate, that is a very diminutive factor, they are a function of inflation if they have to be effective. Inflation as we know can be avoided by producing enough goods to make up for it. You see it all come down to supply and demand, all these factors are in fact to aid in supply and demand.

Well, the US is generally considered the richest country in the world, with a very high GDP pr. capita. Still the US has a higher percentage of poor people than most western countries. That is because of the division of the wealth.
Another issue is national debt. How come the "richest" country in the world has the highest national debt in the world
GDP is the total goods divided by the population, what this just says is according to the papers America is rich. Real life is a tard different as we all know. I



I believe you have misunderstood the concept of exchange rates. It is mostly a concept of supply and demand of a currency. It is affected by the interest rate, import, export and more

I have heard all that before but they still do not circumvent the fundamentals. Exactly which begs the question where does a corporation stop and a nation begins. As far as I can remember America and its land is better desired than any other place. Many people would rather do business in America than many other places. In fact many transactions are officially in dollars. To make everything clearer let’s consider the official market as also a black market, just supervises by “officials”. To make money in any market you have to buy low and sell high and you have to be able to not only produce but add value to your product, all these has to be done regardless of market conditions. The reality is that those producing the most ought to be of higher value. It’s a no brainier. Debt, interest rates, all those things don’t really matter. Is the same heavily in debt U.S currency not of higher value than a hundred other countries? Then why? On interest rate, that is a very diminutive factor, they are a function of inflation if they have to be effective. Inflation as we know can be avoided by producing enough goods to make up for it. You see it all come down to supply and demand, all these factors are in fact to aid in supply and demand in on way.

I see the world as a single market place so I guess I have this problem of seperating. After all multinationals do as well.

I have never heard of reducing inflation by production. I know you can control it by controlling employment, adjusting the the interest rate or adjusting the amount of money. How does this work?

Inflation is too much money chasing few goods, in other words underprduction. To counter this you produce more goods or take money out of the society. Deflation is the opposite, too many goods but little money.

One of the major advantages multinationals have, is that they can separate the world into different markets. That gives them the opportunity to have the maximum marginal profit in each market. If they viewed the world as one single market place they would be silly and lose tons of money.

I suppose that would work, unless higher production would require more workers, which would press salaries up, or flood the market, which would give the producers a lower price and possibly a lower profit.

Are you in school? If so maybe you can ask your teacher why some money are more valuable than others. I agree its not a form of "richness", but ask your teacher why the pound is higher than the dollar and ALL other countries in the world.

Money has no real value, it only signifies a symbolic value. It used to be a value of a certain amount of gold. 1000 british pounds could be a kilogram of gold and that could be 1778 USD. That would make a british pound more valuable than a US dollar, but only because it signifies a higher amount of gold. It doesn't make Britain any richer. Now they don't use gold any more, but the point is the same.

Have you understood my query lien

Anyway what makes gold of any value lien? What makes it different from say mercury or Aluminium.Multinational goods aside, richness aside. Just why is the pound more valuable than every other currencies. My guess is since the industrial evolution started in britain it uped their GDP and value in currency respectively. My confusion is that the few countries today with higher GDP's do not have of equal value in currency. In fact the technological revolution took place in places like Japan and the U.S. Listen there is realy no such thing as 100 yen = 1 pound, idealy it should be because of inflation in japan that we have such statements. So why is there inflation in japan, which has a more favorable production rate (GDP). Some say the government intentionaly devalues the currency for economic reasons but exactly in who's interest is this crap. Would you like to take 10,000 yen to the grocey store in Japan? Lien says money is of no value, the real answer is yes. The value of money is actually equal to the goods and service in terms. In fact the real role of money is to measure the value of goods and services if you remember your economics. So again my query, why is the GB sterlin the single most valuable currency despite the fact that many other countries produce equal or near equal amounts and quality of goods and services.

it didn't start out at the same value... A yen has never been the same value as a sterling pound.. Neither has a dollar. I am not sure what else to say. you cannot compare them the way you are trying to.

http://www.opinion.telegraph.co.uk/htmlContent.jhtml?html=/archive/1997/01/17/cpou17.html

Basically a strong currency means very little inflation, which in turn will keep interest rates low or stable since the agenda of the government will then be to expand the economy by teasing investors.

http://www.accountancyage.com/accountancyage/news/2017246/big-question-fds-think-strong-pound-negative-impact-business

You may have heard this before and many times over. Higher currency means very little avenue for exporting goods out of Britain. Exactly who this is benefiting I have no idea.

http://tamizhan.org/item/78

And you were asking me again why Brits have no advantage over other countries?

http://calbears.findarticles.com/p/articles/mi_hb3486/is_199707/ai_n8274510

I have no idea why he made this demand, is it some kind of pretentious motive? What about the export industry?

Here is my assertion. In the NYSE market values are determined by earnings, demand, and a little propaganda. So please someone tell me what determines the value of currencies. Interest rates? Not exactly. Since Japan had a higher GDP two years in a row than Britain’s it should certainly not be inflated and interest rates should be low. However according to Japanese officials in 2001 “the economy never met its potential” was their own reason interest rates were kept low. In other words it’s all about what one group of people’s point of view or feeling says not what the reports denote. See the confusion? So here’s my conclusion. In the money exchange market like many other markets they are certain movers and shakers who determine prices; think major investors or shareholders. This groups such Britain’s John Major are after profit like any other investors and have no real interest in current economic conditions. However the group, usually the government, subsidizes certain investors or interest groups such as when Honda demanded for subsidy on their manufacturing plants in the U.K due to the high pound value in 2000. Its all about money, whenever stuff like this happens it all comes down to money. If I am wrong…phew, you will find it hard to explain why the pound is stronger than many. http://www.thestreet.com/markets/marketfeatures/1322802.html

it didn't start out at the same value... A yen has never been the same value as a sterling pound.. Neither has a dollar. I am not sure what else to say. you cannot compare them the way you are trying to.

Have you read my posts at all lien. Oh wait are you saying maybe the british were once rulers of the world

There is a big difference between a strong currency and a currency of higher value. A strong currency is of relatively higher value compared to another time in history. The NOK is of relatively higher value now than a few years ago compared to the dollar, even though you pay 6-7 NOK for a USD.

LOL You obviously have no investing experience lien. Do you? Listen the first and foremost agenda for any businessman is to add value to something. Thats the only way money is made. So wherever value is being added to soemthing,,,I bet my two eyes someone is gaining as well. LOL

I recommend you talk to someone who can explain the currency system for you, maybe a professor of economics or something. I surely cannot. I am not sure how to better describe it than I have already done, and it would be going in circles from now on.

Thanks. But I think you are looking at a country too much as a place with a certain gropus of people and thats all. You are forgetting its also basicaly a gigantic corporation. I have asked economics teachers this question and they can't seem to figure it out. LOL usual of any market. Okay are you saying no one is gaining from a strong pound even after all the constant efforts?

Every site I have visited on this issue keeps saying a strong currency is not necessarily good and a bad one necessarily bad. So who's gaining from the ups and downs then? See. I suggest you read this.
http://www.edlotterman.com/StrongDollar.htm

Did you know that in the money market there is no bear market? So how else will you make money regardless of economic conditions eh?

International Finance

• Money has no value in itself, currencies are only valuable if people believe that they are worth something in the present and in the future.

• Governments issue money, and attempt to maintain the public’s confidence in its value. From sovereignty national governments derive the power to create their own currency as the sole legal currency in a territory.

• There is no single world currency today with a value relative to goods and services that could facilitate exchange among buyers and sellers from different countries.


How does exchange occur between countries with their own national currencies?

Exchange rates—The rate at which one state’s currency can be exchanged for a different state’s currency.

Relative values of currencies at a given point in time are not that important; changes over time matter.

Non-convertible currencies—there is no guarantee that the holder of such a currency will be able to trade it for another currency, or for goods and services.

What makes a currency non-convertible?

Inflation: when a currency is losing value relative to goods and services

Hyperinflation: more than 50 percent per month, or 13,000 percent per year.

-inflation reduces a currencies value relative to more stable currencies.



Hard currency—money that can be readily converted to leading world currencies. (U.S. Dollar)

Reserves-stockpiles of hard currency, it used to be gold was the hard currency of choice and some countries still maintain gold reserves.

Two forms of currency exchange:

1) Fixed exchange rate—relative values of currencies are determined by individual, or groups of governments.

2) Floating exchange rate—relative values of currencies are determined by global currency markets in which private investors and governments alike buy and sell currencies.

Managed float system-when national governments periodically intervene in currency markets to manipulate the value of a currency.



Why do currencies rise or fall in value?

1) Political Stability-government instability
reduces confidence in the currency created by
government.

2) Economic policy and growth-investors want
to hold a currency with low inflation and good
prospects for a return.

How is international finance related to trade?

Devaluation—a unilateral move to reduce the value of one’s own currency by changing a fixed or official exchange rate.

Example: Year 1  1 dollar is worth 100 Yen
Year 2  1 dollar is worth 80 Yen

Need fewer Yen to buy same amount of ($1) American goods in year 2, Japanese buy more American goods. This hurts other countries, but can improve trade balance.

Problems with devaluation:
1) Reduces confidence in your currency.
2) Consumers suffer as prices increase.

Why would countries want to devalue their currency?

Balance of Payments: financial statement of the country, summarizes all the money flows in and out of country.

Three Parts:
1) Current Account-trade balance.
2) Capital Flows-foreign investments in and by a
country.
3) Reserves: stockpiles of hard currencies.


How is a stable monetary system maintained?

Before 1944:
Gold and silver were the ‘world’ currencies because:
1) pretty, easily shaped into jewelry.
2) relatively rare and hard to mine.
3) durable, and difficult to counterfeit



Bretton Woods (1944)  “Bretton Woods” system established.

Created by World Bank and International Monetary Fund (IMF), which itself was initialy created after WW2 for developing europe post World war.

1) U.S. pegs the value of the dollar to gold ($35 per ounce)
2) Dollar convertability established
3) Other currencies were fixed to the dollar at rates established by the IMF.



VII. Fixed FX Again: The Bretton Woods System
A. Post World War II IPE in Bretton Woods, New Hampshire, 1944
-TASKS
~ create postwar economic order that is stable and flexible
~ promote economic growth and development
~ avoid nationalistic pressures that lead to war
B. Establishing institutions and their roles
-Goals: to construct a set of IPE structures built on pluralistic international institutions and not solely the hegemon
-Institutions and International Monetary System: The World Bank, International Monetary Find, General Agreement on Tariffs and Trade, Bretton Woods FX System
C. Bretton Woods FX system (1946-1973)
-is a fixed exchange rate system built on a gold-dollar standard→ dollar became medium for international transactions→ US bears burden of financial hegemon
D. Fall of Bretton Woods system
-late 60’s US had domestic war on poverty, Vietnam, and Bretton Woods required more financial discipline than US could have
-1971 Nixon chose national interest over international responsibility and broke link between dollar and gold

VIII. The Lessons of Bretton Woods
A. Lessons
-futility of trying to set exchange rates through state action rather than market forces
-important role of benevolent hegemon
-temptation of hegemony (exploitation for own gain)
-example for selfish nationalistic action by US and capitalist exploitation
B. Gold too rigid and Bretton Woods too unstable
C. Most important lesson
-There is a fundamental tension between domestic needs and international responsibilities built into any structure of IPE


A Series of Crises:

1) Dollar shortage  international shortage of dollars to buy U.S. goods with and U.S. was leading economy at end of WWII.

How do you get more dollars into system?

The costs of hegemony:
• Marshall Plan-loans and grants for reconstruction in Europe and Japan
• U.S. encourages deficits in its own balance of payments.
• Allowed other countries to discriminate against U.S. exports in GATT

Why did the U.S. pursue such policies?

1) Short term economic costs for long-term gain of building U.S. markets abroad

2) Economic costs for political benefits, rebuild our allies.

During the 1950’s and 1960’s the system worked very well.
-Europe and Japan revive
-worldwide economic growth

Why did it work so well?

1) power concentrated in the rich West (U.S.), fewer disagreements
2) shared preferences for an open international economy
3) Cold war encouraged the U.S. to undertake burdens of system and others to accept its leadership for military support.

By the 1960’s the dollar shortage was a dollar glut.
-dollar is overvalued, could not be maintained at $35/ounce of gold. U.S. begins running a trade deficit.

When the value of a currency is too high, exports cost more reducing the amount that people by, imports are cheaper in U.S., meaning people buy more.

By 1971, something had to be done, U.S. no longer able to uphold system.

• Nixon announces U.S. will no longer exchange dollars for gold.
• Industrialized countries move to floating exchange rate system based on IMF.
IX. Markets at Work: Floating Exchange Rates
A. FLEXIBLE or “floating” exchange rates: “set by pure market forces with a minimum of direct state influence” (141); “under a system of flexible FX rates, a nation’s FX rate depends on the expected value of its FX ticket (to goods, services, investments) relative tot eh tickets of other nations” (141)
B. In theory and in practice
-Theory: intended to resolve tension between domestic needs and international responsibilities; put market in charge of international system and states look after own priorities; intended to replace unwise actions of hegemon with efficient action of market
-Practice: impossible to isolate markets from states since state actions necessarily influence value of an FX ticket; floating exchange rates are so flexible that they’re unstable (see example p. 142)
C. Arguments for and against
-FOR: Economic liberals; argue that problem lies in unwise states; flexible rates would work fine if governments would behave
-AGAINST: Realists; states cannot be relied on to follow laissez-faire policies when vital domestic or international interests are at stake
D. Important reason for failure of floating exchange:
-FX market is an instrument that has too many functions under a floating FX system; can’t perform them all at once

X. States and Markets Together: Managed Exchange Rates
A. Managed Exchange Rates: “this system attempts to combine the best of both state and market actions, while trying to avoid their failings” (143)
-EXAMPLE: European Monetary System (EMS)
~ currencies in European Union linked in system to minimize instability through state action
~ market provides short run flexibility and states intervene to provide long run stability
~ currencies in EMS stay relatively fixed against each other
B. Policy Coordination: key to managed exchange rates
-states, through central banks, agree to cooperate with each other to avoid taking domestic actions that provoke international instability
~ if 2 national economies going in same direction at same speed, then FX rates should remain fairly constant because value of one FX ticket relative to another should not change dramatically
C. Practical problem with managed exchange rates
-policy coordination requires for the state to be willing to sacrifice what’s in their nation’s interest to preserve a stable international financial structure
-because of self interest, policy coordination not guaranteed in the long run

XI. The Problems of the World Monetary Order
A. FX system needs a hegemon to keep balance between flexibility and stability, but not selfish hegemon
B. International monetary system interacts with other structures of IPE
-creates economic and political tensions, strain on trade, security, and technological structures

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exert from Jason Chambers
http://students.washington.edu/lilyyuan/sis201/wk2outline.doc
http://garnet.acns.fsu.edu/~agl3272/Financet.doc

So you see. It’s all determined by interest groups and government policies/ market conditions. But since most government are usually affiliated or in fact are interest groups themselves you might as well say the whole show is determined by interest groups; think Japan in the last 2-3 years. Ultimately think of a nation as a corporation and its currency its stock. Corporations are supervised by the state, the prices are determined by certain eco-political conditions but the shareholders play a huge part as well, in the end its all about gain. Anything else you want to add?

http://www.forex.com/history_forex.html

Did you read that; 95 % of these trades are for profit and speculation? The reality is that a group of investors preferre to purchase dung load of the Pound sterling and dollar more than any other currency. This is why they are high in value. Why? Well it will help when the exchange is located in London, NY, and Asia. But more seriously these countries are also the military super powers of the world and any safe investor should bet on them. There are endless reasons why currency appreciate and vice versa due to their macro nature. Third world nations have bitten the wrong end of the stick. International groups may just simply buy third world currencies out of inflation to equate third world currencies with developed worlds in order to eradicate poverty once and for all but sheesh! Where are others going to outsource and make their hefty profits? And how are you going to tow all those armored tanks to the third world deserts? Thus we continue the charade of eradicating poverty. End of discussion as it is.

Balance of payment. Aside for other reasons why currencies do what they do is balance of payment. Let’s say a country has inflated, that means they will have to sell their excess currency rather cheaply to investors to balance the books. In the case of the U.S, which has relatively little inflation why do they still sell their currency cheaply to the British? It is very rare and difficult to actually have the total money in circulation exactly equal to good and services, which is why countries sell currencies all the time. The only other way to take money out of circulation is to raise interest rates but that is usually not very effective when you have a stock pile of reserves. So how do the British manage this feat? There you are. My guess is that it all started with equalizing the pound with the gold, ever since then we pretty much let sleeping dogs be laid. Now you see why I was asking why the Yen is undervalued compared with the pound considering Japan has a higher productive rate. However it’s ultimately not about GDP or how fast you can produce but how well you maintain your checks and balances, which as it appears today the British are best in. My guess is that the World Bank keeps tabs of the total money in each country.