By Definition, An Exchange Rate Is “The Price Of A Nation’S

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By definition, an Exchange rate is “The price of a nation’s currency in terms of another currency” (1). It is one of the most important measurements for determining a country’s economic strength, and it impacts people’s daily life too. As a foreign student studying in America, we have to pay very close attention to the exchange rate, and this promoted our interests in why exchange rate is floating all the time. In general, exchange rate can be affected by many factors include inflation rates, interest rates, or government policies. But in this paper, we’re focusing on the relationship between exchange rate and political decisions. First of all, we believe that the exchange rates can be affected by political decisions. For example, the…show more content…
Not long after, Japan suffered a long period economic recession, also known as “lost decade”. Good political decisions on the exchange rate can ensure economic stability and prosperity. As we all know the Asian financial crisis in 1997, started with the devaluation of the baht, further spread to almost all countries in Asia. The Chinese government made a very critical decision of refusing to devaluate the Chinese Yuan during the crisis, also including Hong Kong dollars. This decision could hurt the Chinese economy. From Hong Kong’s perspective, the strong Hong Kong dollar would affect Hong Kong’s tourism industry, reduce foreign investments. More importantly, it would also decrease the export competitiveness of mainland China. A major part of China’s economy is based on labor-intensive export enterprises, so refusing to devaluate the Chinese Yuan in the crisis could knock down these export enterprises and result in thousands of people in China losing their jobs. However, we think this decision of refusing to devaluate the Chinese Yuan was a good political decision overall. Even though with all the risks associated with this decision, Chinese Yuan became the most reliable currency in the crisis, helped other countries suffered from the crisis to stabilize their economies, so the international status of China had a significant improvement because of this political decision. After the crisis, China joined the WTO in 2001 due to the good

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