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Fixed Exchange Rates

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CHAPTER ONE 1.0 INTRODUCTION: 1.1 BACKGROUND OF THE STUDY. The manufacturing sector has always been known in many nations to be a vibrant and buoyant sector that have always served as a mechanism for any economy to grow, develop and also improve its citizenry standard of living vis-a-vis maintaining a favorable balance of payment for its economy, also the manufacturing sector has as well been known to be a major driver for technological advancement in any economy. For instance, according to the Bureau of Labor Statistics (BLS, 2012) there were 17,619,000 Americans that had been employed in the manufacturing sector as at the year 1998. Also another similar situation is the Chinese emergence as a strong manufacturing powerhouse that became so …show more content…

The initial concept of a fixed exchange rate, the rate was usually fixed at a rate that is at par with and is tied to the gold standard, this was operated under the Bretton woods agreement for a fixed exchange rate. But after the collapse of the Bretton woods agreement, nations who still maintained a fixed exchange rate had their rate fixed by the monetary authority. And the fixed system would have to be maintained at point of equilibrium by the readiness of the apex monetary authority to service the fixed rate by buying and selling currencies either with the use of its foreign reserve. For instance the Chinese economy operates a fixed system of exchange …show more content…

Cassel, (1920) developed the relative version of the PPP, which he put as the rate of exchange that is determined between two countries at a point which expresses the equality between their respective purchasing power of the two currencies. The relative version is usually referred to as a moving par and not a fixed par, thus a change in the price level the exchange rate will also change. According to Cassel, (1920) the described the determination of the PPP as a quotient of the purchasing power of the different currencies. Putting more succinctly, the PPP predicts the PD (E) = PF. (PD and PF are the price index of the domestic currencies and foreign currencies and E is the exchange rate), as with other parity, the degree of to which the arbitrage imposes on the PPP is a function of the transaction

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