chapter  Lecture 22
14 Pages

Rates of Exchange

The proportion in which the mutual benefit is divided will depend upon the rate of exchange between the two national currencies. This rate of exchange will in turn be determined by the strength of demand for imported goods in each of the two nations. If two nations, each initially possessed of a self-sustaining economy, enter into bilateral trade, it is possible that both should benefit. The imposition of tariffs is considered as a two-person game, in which each nation tries to maximize its own calculated gain from trade. As compared to free trade in paper currencies, international "pegging" of currencies in terms of gold has the advantage of eliminating minor day-to-day fluctuations of exchange rates, thereby relieving one of the worries of exporters and importers. The same result may be obtained by international guarantee arrangements of the type of the International Monetary Fund.