Worksheet 23.1- Exchange Rates

Exchange rates, currency manipulations and the balance of trade

1. How does China continuing to undervalue its currency threaten the industrial economies of its largest trading partners? 
• As china is artificially keeping i's currency at a low level compared to the dollar of United States, one of its largest trading partner. It is making sure US companies rather want to  have their goods manufactured in china as the labour there is cheaper due to the low value of China's currency. Yet US's large companies don't develop factories in the US itself, the problem of high unemployment might suffer even more. Less manufacture and high unemployment will eventually lead to a decrease in market size and economic development.
  
  
2. What is China’s purpose for maintaining the low value of the RMB relative to the currencies of other nations? 
• As china has a large population it also has a large quantity of labour, a lot of it unskilled labour. Therefore they have a lot of people to work to produce manufactured goods for a low wage. As China maintains it's currency at a low value, it will be cheaper for foreign countries to buy China's exports making them more appealing. Through selling more of their goods, China experiences economic growth in relation to the market size and money in the circulation.
  
  
3. What would be a unilateral protectionist measure the US government may advocate if the WTO refuses to take action against China’s currency manipulations? How would you advise president Obama on the issue of whether to take protectionist action against China in the context of the current economic crisis in America?
   
• A unilateral protectionist measure the US government could take against China, would be to impose a quota or a tariff on the imports from China. This could cause an aggression in the population of United States as many of their goods would suddenly become more expensive, yet the build-up of domestic factories providing available vacancies would take a bit of time. Yet eventually this wood lead US out of the economic crisis and maybe even move to growth.
  Placing quotas on foreign goods has helped US before, like when they places quotas on... steel. With the quotas in place they could develop their domestic manufacture of steel, which eventually lead to US steel productions   being one of the cheapest and most efficient in the world. I'd advise for US to set quotas on certain goods, yet only when being sure there would be someone ready to develop domestic production of the exact same or supplementary good.