Tuesday, 18 February 2014

Dear students of Grade IX -D
You are suppose to solve this case study and submit it tomorrow (19/02/2014)

1 China decides to move towards a more flexible exchange rate

In the past, the Chinese Government kept an exchange rate of 6.8 yuan to US$1. However, a
spokesperson for the People’s Bank of China, the country’s central bank, said that it would begin
to allow the market to play a much greater role in determining the exchange rate. It is expected
that a more flexible rate will result in an increase in the value of the Chinese currency.
China has had a surplus on the current account of its balance of payments in recent years.
Economists believe that an appreciation of its currency should help to reduce the size of the
surplus.
The decision by China will please the United States (US) and many other countries which have a
large trade deficit with China. The President of the US has said that “market-determined exchange
rates are essential to global economic vitality.” If the Chinese Government had not decided to
allow its exchange rate to be determined by market forces, many American companies would have
demanded tough protectionist measures to reduce the number of Chinese imports coming into the
US. They had criticised the Chinese Government for keeping its currency artificially weak which
gave Chinese exporters an unfair advantage.
(a) What evidence is there in the extract to suggest that China is planning to move from a fixed to
a floating exchange rate? [2]
(b) Analyse how a rise in the external value of the yuan might affect China’s current account
balance. [6]
(c) Explain why a large surplus for China over many years in the current account of the balance
of payments could be a problem for other countries, such as the US. [4]
(d) Discuss the extent to which trade protection could correct a balance of trade in goods and
services deficit. [8]

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