[SOLUTION] International Economics

So it is a research paper on international economics. I started about 5 pages of it. I can have a page of graphs etc. It has to be 15 pages altogether. I’ll send the prompt right now Topic 1: As the United States gained economic power and political influence relative to Great Britain after World War II, the dollar emerged as the key currency in international use, replacing the pound sterling. Some observers believe that the dollar might in turn eventually be supplanted in international use by another currency. The mark and yen both gradually rose in prominence in the 1970s and 1980s at the expense of the dollar. This trend, however, fizzled out in the 1990s. A new challenge was created on the first day of 1999 when the euro, the currency of the European Monetary Union (EMU) was born. The euro has now fully replaced the Deutche mark, French franc, and ten other European currencies as well. An increasing number of countries now hold reserves in euros and issue debt denominated in it. Because the euro has become the home currency among a set of countries that are collectively almost as large as the United States, it could aspire eventaully to rival the dollar as an international currency. China’s emergence as an economic superpower imposes another threat to the dominance of the U.S. economy, and the dollar’s status as the vehicle currency could also be challenged by the yuan, the currency of China. Some coutries have begun to use the yuan in their international transactions. The dollar is still enjoying its dominant position in international real and financial transactions. The choice of currency is based not only on the current relative importance of the respective countries in the world economy, but also on the relative use of the various currencies in the recent past. It has been estimated that roughly 60 percent of U.S. dollars are held abroad. Like the English language, people will continue to use the dollar internationally as long as the U.S. economy maintains its superiority in the world economy. Discuss the status of the euro and the yuan in international finance and trade and the strenths and weaknesses of the dollar as the leading currency. Do you think that the euro or yuan will eventually supplant the dollar? _________________________________________ What has been written so far Foreign exchange is very important in the well-being of each country. It is defined as the trading of different national currencies. It is the conversion of one nations currency into another nation’s currency. It is bought and sold just like all other merchandises. Every single nation is involved in foreign exchange; however, some take more part in trade than others. This becomes super important to each country because the exchange rate, also known as the price of a nation’s currency, is what determines a country’s economic health. This then determines the welfare of the people residing in that nation. There are many factors that determine a nations currency value. In free economies, a nations currency is mostly based off the laws of supply and demand. Free economies also can float their currencies against those of other countries. For example, the demand for a currency comes from the demand of that country’s exports. This means that other nations doing foreign exchange with this particular country are looking to generate a profit from the changes in currency values. Now on the other hand, the supply of a currency is determined by the domestic demand from imported goods. For example, when the US imports its Mercedes Benz cars from Germany, it must pay the company in its nation’s currency, which is a euro. When it comes time for the US to sell Mercedes Benz cars to the people of their nation, they must sell it in US dollars.  The more of these imports, the greater the supply of US dollars gets put into the foreign exchange market. This can be beneficial to the US because it ends up strengthening the value of the US dollar. A strong US dollar can buy more foreign currency. You get more for that US dollar after converting to another nation’s currency. Lots of Americans love when the US dollar is strong because they then can travel overseas for cheaper values. When figuring out whether or not to do business in a foreign country, it is important to understand how currency values and exchange rates play a significant role in business deals. Exchange rates have influences on income factors such as inflation and interest rates. These 3 things are all tightly integrated together. When manipulating interest rates, higher rates usually increase a specific country’s currency value. This means that the higher the interest rate, the more that country lures in foreign investors. This then would be increasing the demand and value of that nations currency that has attracted the foreign investors. Now on the other hand, if a country has low interest rates, it would be more unattractive for foreign investments which ultimately would end up decreasing the country’s currency value. When a country’s interest rates are increased, it can help decrease inflation. When a country has high inflation, the value of their currency decreases, which is not what a country ever wants. Inflation causes an increase in the price of goods, therefore creating less demand for foreign exchanges.  This ultimately makes long term investments hard to obtain. Increasing a real investment purchasing power becomes tricky with inflation because investors must first keep up with the inflation rates. For example, an investment in an environment with 3% that has a return of 2% before inflation ends up only producing -1% after adjusting to the inflation. This would make it pointless and unfavorable for an investor to stay in this market. The United States has managed to become the leading international currency. The first US dollar was printed in 1914 by the Federal Reserve Bank. The Federal Reserve Bank was first created in 1913 in response to the instability of currency systems. Britain was previously known as having the leading currency known as the British pound. Britain had the largest center for world commerce. However, when World War I broke out, many countries switched from gold payments to payments of paper, helping create more transactions with the use of the pound. This resulted in Britain becoming the world’s leading currency, however, Britain ended up having to borrow money. The US then entered the game and became the lender of choice. The US attracted many countries by letting them buy dollar denominated US bonds. This resulted in Britain abandoning the gold standard. There are many benefits that come while having the US dollar has the leading currency. When the US dollar rises in value amongst other currencies in the foreign exchange market, it is considered as being the strongest form of currency. When the US dollar is at its strongest, it is then able to buy more foreign currency rather than when a different form of currency is stronger.  All Americans benefit when the US dollar is the leading strongest. Americans are able to take their dollars even further when abroad. The dollar has a greater degree when abroad. Americans are able to buy more goods when converting the dollar to the currency of the country they are in. Not only do American citizens benefit, but businesses in America benefit as well. Goods that are produced overseas and are imported into the United States become cheaper as well. For example, luxury cars such as Mercedes Benz, BMW, Ferarri, etc would all fall in price in regards to the dollar. If Mercedes Benz is selling a car in its home country, Germany, for 70,000 Euros with an exchange rate of 1.35 dollars per euro, it would cost 94,500 US dollars; however, if this same car has a new exchange rate of 1.12 dollars per euro, it would then only cost 78,400 US dollars. The European car costs less when the US dollar is stronger making a lower exchange rate of dollar per euro. The price of imports fall as the dollar continues to strengthen. As other lower cost imports fall in price, more disposable income is left in the pockets of American consumers. Disposable income is the amount of money households have available for spending and saving after income taxes have been accounted for. This is often one of the key factors indicators in finding the overall gauge in the state of the whole economy. Overall, Americans, US business and multinationals that do business in the US all benefit from having the dollar as the leading currency. Although there are many benefits that come with having the US dollar as the leading currency, there are also many disadvantages that come with it as well. While having the US dollar as the strongest form of currency, it results in a decrease of tourism in the United States. Prices of goods and services become much more expensive for aboard visitors due to the dollar being stronger. Business travelers or foreigners living in the United States that still maintain foreign denominated bank accounts, or get paid in their home currency, will also disadvantage from a strong dollar. Although they are in the United States, they still convert currencies, resulting in higher prices for them. As imports become cheaper, domestically produced goods become relatively more expensive abroad. For example, an American made car would be higher in cost if a European that lives in Italy were to buy it. Some people argue that having such expensive exports can cost American jobs. Since American produced goods are so expensive, many people/ foreigners are unable to afford it, resulting in a decrease of production need. Although the world is known for having one currency in response to attaining hegemony, multiple currencies can in fact co-exist. There are many economists that only believe in one dominant reserve currency. The economists argue that there can only be one form of currency that will always be able to overpower the others in regard to trade and foreign exchange. They believe that there is a reason it dominates the marketplace and why it can never lose much to its challenges. However, other economists, specifically Barry Eichengreen, believe that it is possible for co-existing currency.  The reason for this is because when referring to the denomination of official reserves, not all network externalities are strong. When a market is appropriately liquid, the reserve becomes strong making it possible to obtain against large capital losses. Barry Eichengreen believes that the world financial system is going to slowly gravitate away from the dominance of the US dollar. During the first half of the 20th century, multiple currencies co-existed with one another as becoming the reserve currencies. Although the US dollar is the strongest form of currency, the euro and yuan are also very popular forms of international transactions. Beginning with the euro, the euro, a single currency, brings new opportunities into the global economy. The euro is a very attractive region for third world countries to do business in. It is very popular in terms of promoting trade and investment


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