Foreign Exchange Market To ensure success in the international business market it is critical to understand how the foreign exchange market functions. Hernandez (2008) stated that, “The foreign exchange market, otherwise known as FOREX or “FX”, has more currency circulating through it than the total amount of all the world’s stock market” (‘1 1). The gold standard has played a major role in international dealings between various countries. In addition to the gold standard, the fluctuating currency rates also play a major role in international business and how the business is being conducted.
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The Foreign Exchange Market was established around 1971 and helped to promote international business on a monumental scale. It has been estimated that the gold standard was used from the periods of 1875 to 1914. The gold standard made a fleeting reappearance after World War II until President Nixon put a stop to the use of it. President Nixon’s decision is still in effect even though he is no longer in power. It is doubtful that the gold standard will ever be reinstated. There are several functions of the world’s major foreign exchange markets. In the Foreign Exchange
Market, it is stated that “The Foreign Exchange market performs an international clearing function by bringing two parties wishing to trade currencies at agreeable exchange rates. ” This function enables equal trading to occur between different nations or countries that use different currencies. This function also applies to people who are traveling for pleasure and has the need to exchange currencies. It is important that all parties involved in international dealings feel they are not being taken advantage of. As more countries feel confident with the competency of the
Foreign Exchange Market then more countries will have the opportunity to become involved with business dealings and to prosper. “Thus, we can say that another function of the Foreign Exchange Market is the participation in the growth of developing nations; helping to eliminate poverty and internationalize their goods and services” (SeaZone, 2008). It would be nice if the Foreign Exchange Market had a common currency or a common sourceto back the various currencies. Gold is a precious metal that all countries or nations can identify and value.
Page 2 University of Phoenix International Business Class Essay
This commonality makes gold the perfect source to use to gauge how much wealth a nation or ndividuals have. “A gold standard is a system in which countries agree to buyand sell gold at a defined number of currency units” (Ball et al. , 2006). The exchange rate is determined by identifying how much an item is worth in monetary value and comparing it to the same item using a different currency. An example is that $100 U. S. dollars is equal to about ‚¬ 77 Euros or $100 U. S. dollars is equal to $152 Australian dollars.
There are six major currencies that are traded on the Foreign Exchange Market: British Pound, United States Dollar, Canadian Dollar, Euro, Australian Dollar, and the Japanese Yen. The Foreign Exchange Market allows tourist and business owners to exchange currency for one of equal value in the country that is being visited. One of the most well known and highly discussed aspects of using worth. Using gold to back printed currency (federal notes or dollar bills) ensures that the government will only print the currency if the country has the gold on hand to back the printed bills.
Secondly, using a gold standard means that all nations have a common factor to use for equal trading. This protects each nation from inflation and allows supply and demand to naturally influence the economy. A few government officials would like to avoid the gold standard because money cannot be created for political reasons or gain. While there are positive aspects to using a gold standard there seem to be more negative aspects that outweigh the benefits.
A negative aspect or one problem in particular with the gold standard is that many nations do not have enough gold on hand to back the amount of printed currencies currently in the hands of the people. In addition to inadequate amounts of storable gold, the value of gold fluctuates at unpredictable rates if new sources are discovered. The use of the gold standard stops the government from producing too much printed currency; however, the federal government can still impose high or low interest rates during emergencies such as war time.