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The global economy and governments ability to control its countrys currency.

Definition of terms

Global economy is an economic interdependence established between the most influential countries that drives the worldwide economic environment. It is also the aggregate economic output, movement and influence of all countries. (My Accounting course).

Currency is the medium of exchange for goods and services. In short, its money, in the form of paper or coins, usually issued by a government and generally accepted at its face value as a method of payment. Governments are the only entities that can legally create their respective currencies.

Introduction

Foreign exchange controls are various forms of controls imposed by a government on the purchase/sale of foreign currencies by residents, on the purchase/sale of local currency by nonresidents, or the transfers of any currency across national borders. These controls allow countries to better manage their economies by controlling the inflow and outflow of currency, which may otherwise create exchange rate volatility. Countries with weak and/or developing economies generally use foreign exchange.

It is crucial that the government controls the currency of its nation. As stated by Gary Gereffi the global economy has changed in very significant ways during the past several decades, and these changes are rooted in how the global economy is organized by the government. These transformations have had implications on how countries operate on the international level. The flow of goods and services across national borders has also been impacted do to these transformations.

Literature Review

The global economy is grounded in a long historical process of increasing political and economic integration (Economic integration is the unification of economic policies between different states, through the partial or full abolition of tariff and non-tariff restrictions on trade). of the countries and regions of the world. The development strategies of countries today are affected to an unprecedented degree by how industries are organized, and this is reflected in a shift in the oretical frameworks from those who centered on the legacies and action of nations-states to a greater concern with supranational insinuation and transnational organization. (Gereffi, 2005)

Policies to control countrys currency

Government has the ability to control and even increase the value of their currency; Government could try several policies to do this. One such policies is to sell foreign exchange assets, purchase own currency. Another policy is Raise interest rates; higher interest rates offer lenders in an economy a higher return relative to other countries. Therefore, higher interest rates attract foreign capital and cause the exchange rate to rise (Investopedia).The third policy that can be implemented is Reduce inflation The level of inflation has a direct impact on the exchange rate between two currencies on several levels: ... The currency with the higher inflation rate then loses value and depreciates, while the currency with the lower inflation rate appreciates on the Forex market. (Trader, 2019) A fourth policy government can put in effect to controls a countries currency is to Supply-side policies to increase long-term competitiveness. (Pettinger, 2019) By making the economy more efficient, supply-side policies will help reduce cost push inflation. Supply-side policies will increase the sustainable rate of economic growth by increasing Long run aggregate supply (LRAS); this enables a higher rate of economic growth without causing inflation.

Inflation and interest rates are often linked and frequently referenced in macroeconomics Inflation refers to the rate at which prices for goods and services rise. In the United States, the interest rate, or the amount charged by a lender to a borrower, is based on the federal funds rate that is determined by the Federal Reserve (sometimes called "the Fed"). (Foldger, 2020)According to Hall, of all the weapons in the government's arsenal, monetary policy is by far the most powerful. Unfortunately, it is also the most imprecise. True, the government can do some fine control with tax policy to move capital between investments by granting favorable tax status (municipal government bonds have benefited from this). On the whole, however, governments tend to go for large, sweeping changes by altering the monetary landscape. Interest rates are another popular weapon, even though they are often used to counteract inflation. This is because they can spur the economy separately from inflation. Dropping interest rates via the Federal Reserveas opposed the raising themencourages companies and individuals to borrow more and buy more. Unfortunately, this leads to asset bubbles where, unlike the gradual erosion of inflation, huge amounts of capital are destroyed. (Hall, 2018)

Rate level is a key consideration for most central banks when setting monetary policy. For example, former Bank of Canada Governor Mark Carney said in a September 2012 speech that the bank takes the exchange rate of the Canadian dollar into account in setting monetary policy. Carney said that the persistent strength of the Canadian dollar was one of the reasons why his country's monetary policy had been exceptionally accommodative for so long.

The important of controlling currency

It is of utmost important that government of a control controls and seeks to strengthen its currency. One such reason being Capital Flows; foreign capital tends to flow into countries that have strong governments, dynamic economies, and stable currencies. A nation needs to have a relatively stable currency to attract investment capital from foreign investors. Otherwise, the prospect of exchange losses inflicted by currency depreciation may deter overseas investors. A strong domestic currency exerts a drag on the economy, achieving the same end result as tighter monetary policy (i.e., higher interest rates). In addition, further tightening of monetary policy at a time when the domestic currency is already unduly strong may exacerbate the problem by attracting more hot money from foreign investors, who are seeking higher yielding investments which would further push up the domestic currency. (T, 2019)

By means of government controlling the countrys currency it can reach a place of economic stability. Economic stability is usually seen as a desirable state for a developed country that is often encouraged by the policies and actions of its central bank.

Conclusion

Government has the ability to controls its countrys currency. There are several strategic and polices that government can implement to do so. A country need a controlled currency and somewhat of a strong currency to development and compete to the global level. Inflation, monetary policies and rates are few aspects when taking into consideration when controlling a countrys currency. Capital from foreign investors is also important to a country but a country cannot attract such investors without a stable currency. The development strategies of countries today are affected to an unprecedented degree by how industries are organized. If the government of a country wants to remain in the global economy system it must have stability in various aspects but main in that of currency. Currency moves can have a wide-ranging impact not just on a domestic economy but also on the global one.

Reference

(n.d.). Retrieved June 2, 2020, from My Accounting course: www.myaccountingcourse.com

Foldger, J. (2020, April 28). Investopedia. Retrieved June 3, 2020, from www.Investopedia.com

Gereffi, G. (2005). The Global Economy organization,Governance, and Developement. The Handbook of Economic Socialogy, 8.

Hall, M. (2018, June 11). Retrieved June 3, 2020, from Investopedia: WWW.Investopedia.com

Investopedia. (n.d.). Retrieved June 2, 2020, from www.investopidea.com

Pettinger, T. (2019, May 3). Economics help. Retrieved June 2, 2020, from www.economicshelp.org

T, S. (2019, August 23). Retrieved June 3, 2020, from Investopedia: www.investopedia.com

Trader, B. (2019, May 25). Central Charts. Retrieved June 2, 2020, from www.centralcharts.com