IGCSE Development Studies: Specimen Questions with Answers 52 - 53 of 98

Explanation

Two Types of Foreign Exchange Rate System Are

• Fixed exchange rate: Fixed exchange rate is the standard exchange rate set by the monetary authorities for one or more currencies. It provides stability that helps to control inflation and keeps the unit labor cost low. There are chances of less speculation if fixed exchange rate is prevailing in the market.
• Floating Exchange rate: Under the floating exchange rate, factors of supply and demand decide the value of currency. It gives freedom to set policy interest rates to meet the domestic objectives. It may also help to prevent imported inflation.

Explanation

Deficit in the balance of trade occurs when the value of imports of goods and services and investment increases than the total value of exports of goods, services, and investment. There are several factors that cause deficit in the balance of trade:

• Not enough domestic companies involved in exporting of goods and services.
• If the value of the domestic currency is over-valued imports will be cheaper thus the value of exports will be greater.
• If the national income increase people will tend to spend more on the consumption of goods and services and if domestic producers are not able to meet the domestic demand then goods and services will be imported from foreign countries.
  • Domestic companies are not internationally competitive.
  • Over rating of the country՚s currency.
  • Government՚s budget deficit.