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Eco Exchange Rates

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Submitted By 54321moretime
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Exchange rates play a central role in the relationship between individuals, economies and the global economy. All of the trade and financial relationships between countries are mediated through the exchange of currencies. Therefore any movements in the exchange rate affect international competitiveness, trade flows, investment decisions, inflation and may other factors.

Exchange rates are the price of one currency in terms of another economy’s currency, which facilitate economic transactions between individuals firms and governments in different countries. The FOREX market refers to the market in which currencies are traded, where the forces of supply and demand determine the price of one country’s currency in terms of another.

In December 1983, Australia switched from a managed flexible peg to a floating exchange rate system. This is regarded as one of the most significant structural changes that Australia has implemented, because it opened up the Australian economy to global financial flows. Under a floating exchange rate system the exchange rate is determined by the free play of market forces and not by government intervention, unlike the previous system of flexible peg where the RBA would ‘peg’ the value of the $A at 9am each day and that price would operate throughout the day.

One way to measure the movements in the exchange rates is the Trade weighted Index (TWI) which measures the value of the $A against a basket of foreign currencies of major trading partners. These currencies are weighted according to their significance to Australian trade flows. Fluctuations in the exchange rates can bring about changes in the BOP which in turn influences the value of Australia’s currency. Two possible outcomes eventuate as a result of movements in the exchange rates; an appreciation or deprecation of the $A, both having positive and negative effects on the...

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