Econ Essay Example | Topics and Well Written Essays - 250 words

Econ - Essay Example In this system, balance of payments is important for financial experts to analyze the currency’s supply and demand. The basic principle is that sales and purchases must be equal. When the supply of the currency exceeds the demand, then there is a balance of payments deficit. When it is the other way, then there is a balance of payments surplus (ibid. 759). In the heyday of government intervention adhering to strict communist principles, the value of the Chinese currency was determined in impractical values in comparison to its western counterparts. In 1978, the Chinese government put in place a dual track currency system where its currency can only be used locally and foreigners must deal through forex certificates. The rules set in currency exchange was also too stringent that there was seen a growth in the black market exchanges. For some time from the mid 90’s till 2005, the yuan was pegged to the value of USD in answer to the 1998 Asian financial crisis. Then in 200 3, the United States had the problem the Chinese exports became extremely competitive when the yuan and the dollar simultaneously dropped. As a consequence, EU and the g& called for a thorough exchange rate evaluation (Poleg n.p.). Bibliography Baumol, William J. and Alan S. Blinder.