There were several things that I found interesting in this chapter. I chose Goeorge Sorosis` one billion in a day and the Big Mac Index.
When Britain was in a recession, the value of the pound fell and international investors withdrew from from their investments in Britain, selling the pound and looking for other opportunities elsewhere. With currency it`s similar, it`s all about the supply and demand. As the demand for pound decresed, so did its value. The government could either "use its reserves of other foreign currencies to buy pounds" or it could raise interest rates, so it would attract foreign investors. However, as we know, raising interest rates is the opposite that one wants to do when in a recession, as it makes the economy even worse. Anyways, even the ERM could not help the fact that the pound was falling and eventually the British government stopped trying to defend its currency and withdrew from ERM. The pound fell 10%, which is the source of Sorosis` gain - a successful bet that made him a billion dollars in one day.
To compare the value of currencies between countries and "evaluate the exchange rates relative to what PPT would predict", the Economists created the so called Big Mac Index. As the McDonald`s really conquered every corner of the world (even the small town in the mountains where my grandma lives), they found it as a good way to find out if the currency is over or under-valued. That seems pretty fair, but the example shows that it doesn`t always work out that well. When American and Chinese Big Mac were compared, the result was that a dollar buys 3,5 renminbi. However, the official exchange rate was $1 to 6,38 - which is quite a difference. That says, even if the Big Mac appears in more than 120 countries, we shouldn`t let it have the final world of the exchange rates between countries.
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