Change and Determination of Exchange Rate

Changes and determinations of exchange rate

Changes and determinations of exchange rate

Whether Chinese Yuan will or should be appreciate is a question widely speculated in world financial markets and intensively debated in China. Since the Asian financial crisis in 1997, there has been keen interest in the exchange rate policy in China. In this paper, we will first talk about the determinations of the exchange rates in China in details. And then, we will review the exchange rate changes and policies of China during the past several years. Finally, we will talk about the current situations and give some suggestions.

Definition and importance of exchange rates
In this section, the paper will briefly describe why we study exchange rate and also look at the definition of this term. Understanding the basic concept of the exchange rate and its importance is the basis for this essay.

In finance, the exchange rates between two currencies specify how much one currency is worth in terms of the other. In other words, it is the value of a foreign nation’s currency in terms of the home nation’s currency. It is not an exaggeration to say that the exchange rate is the single most important macroeconomic variable in an open economy, especially in the present environment of financial deregulation and globalization of financial markets.
From a microeconomic perspective, the exchange rate is very important. Even if a firm does not deal with the rest of the world, it is also exposed to foreign exchange risk because the fluctuation affects its share in the domestic market. For example, domestic currency appreciation induces foreign firms to enter the domestic market, thereby threatening the market shares of purely domestic firms. From a macroeconomic perspective, exchange rate fluctuations affect output, employment, inflation, the external balance, interest rates, and monetary and fiscal policies.

Determinations of changes in exchange rates