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Chapter 30: Problem 2

How were exchange rates determined under the gold standard? How did the Bretton Woods system differ from the gold standard?

Short Answer

Expert verified
Under the gold standard, exchange rates were determined by the gold content of different currencies, as currencies were convertible into gold. Under the Bretton Woods system, exchange rates were fixed relative to the U.S. dollar, which was itself pegged to gold. Thus, the Bretton Woods system revolved around stabilization of economies and financial aid for development, while the gold standard aimed at providing stability of exchange rates.

Step by step solution

01

Understand the Gold Standard

Under the Gold Standard, the value of a country's currency was tied directly to a specific amount of gold. Each country based its currency on either a direct gold ownership or gold bullion standard, meaning that the government guaranteed that it would exchange its currency for its value in gold upon demand. The exchange rate was thus determined by each country's set gold price.
02

Understand the Bretton Woods System

In the Bretton Woods System, each member country agreed to fix the value of its currency in terms of the U.S. dollar or gold. However, only the U.S. dollar was convertible into gold. This system essentially created a fixed exchange rate system where countries were obligated to intervene in foreign exchange markets to maintain their rates within a 1% band around the agreed-upon level.
03

Comparison between Gold Standard and Bretton Woods System

Under the Gold Standard, the exchange rate was determined by the gold content of different currencies. Contrarily, in the Bretton Woods system, the U.S. dollar replaced gold as the main standard of convertibility for the world's currencies; and hence, each country’s currency was pegged to the U.S. dollar instead of gold. While the gold standard emphasized the stability of exchange rates, the Bretton Woods system was more about stabilizing economies and providing financial assistance for economic development.

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Most popular questions from this chapter

(Related to the Apply the Concept on page 1067 ) An article in USA Today argued, "lronically, the euro's falland the benefit for German exports -is largely the result of eurozone policies that Germany has taken the lead in opposing ... [including] easier money policies by the European Central Bank." a. How does the "euro's fall" benefit German exports? b. How is the euro's fall related to policies of the European Central Bank?

In December \(2016,\) you needed 83 percent more pesos to buy one U.S. dollar than you had needed in December 2004\. Over the same time period, the consumer price index in Mexico increased 57.8 percent, and the consumer price index in the United States increased 26.7 percent. Are these data consistent with the theory of purchasing power parity? Briefly explain.

What is an exchange rate system? What is the difference between a fixed exchange rate system and a managed float exchange rate system?

What does it mean when one currency is "pegged" against another currency? Why do countries peg their currencies? What problems can result from pegging?

An article in the Toronto Star discussed the Canadian teams that play in the National Hockey League, the National Basketball Association, Major League Baseball, and Major League Soccer. The article noted, "Under their collective agreements players get paid in U.S. dollars. The majority of [team] revenue, however, is in Canadian currency." Are Canadian professional sports teams better off when the Canadian dollar increases in value relative to the U.S. dollar or when it decreases in value? Briefly explain.
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