Gold Standard or Floating Exchange Rate

Topics: Foreign exchange market, United States dollar, Bretton Woods system Pages: 4 (1388 words) Published: September 6, 2008
Gold Standard Versus Floating Exchange:
Which is the Better Method?
By: Jane Doe
Eco 500
In this paper, I am going to discuss and compare exchange rates. The two types of exchange rates are the Gold Standard and the Floating exchange rate. First, I will describe exchange rates. Second, I will compare the two types in this dissertation. Third, and finally I will give my conjectures and beliefs on which I consider the better system. An exchange rate is, “The price of a unit of one country’s currency expressed in terms of the currency of some other country.”(Multinational Business Finance) An example of this is taking the United States dollar alongside the British pound. I will not be using an actual rate, just a rate for comparison purposes. If someone wanted to exchange dollars into 10 pounds and the rate is 2 pounds to the dollar, we simply take 10x2=20. It would take $20.00 United States dollars to obtain $10.00 in British pounds. This means that the pound is valued more than the dollar since it takes more dollars to equal one pound or one unit of British currency. A fixed exchange rate/Gold Standard is, “Monetary system in which the standard unit of currency is a fixed quantity of gold or is freely convertible into gold at a fixed price” ( The fixed rate developed from the Bretton Woods conference after WWII. If a country uses this standard to pay for imports and such they must have the gold to back up the paper money they give the exporter. In this example, we will use the U.S. and the U.K. again. If the U.S. wants to pay the U.K. for double decker busses for a new tourism program, they must have enough gold in their reserves to give the U.K to equal the paper currency amount given at time of sale. If the gold rate is $3.00 U.S. per ounce and the U.K. was £4.00 total value is $.75/£. A floating exchange rate is, “A country's exchange rate regime where its currency is set by the foreign-exchange market through supply and...

Bibliography: De Grauwe, P. (2005). Exchange Rate Economics. Cambridge, MA: The MIT Press.
Sarno, L. & Taylor, M. Foreword by Jeffery A. Frankel (2003). Economics of Exchange Rates. Cambridge United Kingdom: University Press.
Eitman, D., Stonehilee, A., & Moffett, M. (2007). Multinational Business Finance (11th ed.). Boston, MA: Pearson Education, Inc.
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