Compare and Contrast Essay on Fixed and Floating Exchange Rate Systems

Introduction

An exchange rate is the price value at which one country`s currency trades for another, on the foreign exchange market (Corsetti, Kuester, & Muller, 2017). For instance, if you are traveling to another country, you will be required to buy the local currency at specified rates. Again, anyone engaged in the international business must fully acknowledge the exchange rate systems of the countries they do business in, since, exchange rates determine marketing, production and vital financial pronouncements. The prices vary from country to country, and they are fundamentally affected by economic variables. These include the monetary and fiscal policy, the shape of the budget, international system, the status and the development of a country`s economy in relations to world`s situations and superior countries, purchasing power of the country, balance and the imbalance in the economy, and more internal and external factors (Corsetti et al., 2017). In this line, there are two significant types of the exchange rate, and they are Fixed Exchange Rate and Floating Exchange Rate.

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Generally, when a government or monetary authority defines the conversion rate, it is referred to as a fixed exchange rate (Komekbayeva, Legostayeva, Tyan, & Orynbassarova, 2016). However, when the market forces determine the exchange, then it is called a floating exchange rate. The floating exchange rate is usually termed "Self-correcting," since it is corrected by any change in the supply and demand chain. Hence, there is a wide range between the two major types of exchange rates. Each system has its advantages which can reflect and a disadvantage to the other system (Komekbayeva et al., 2016). To contrast the two exchange rate systems, I will consider exploring their advantages and disadvantages.

Fixed Exchange Rate System

With a fixed exchange system, the stability of the exchange rate is ensured, and this is bound to encourage international trade. Two, it enhances the coordination of the macro policies of a country in an independent world economy. This exchange system combats significant economic interferences in member countries. The fixed exchange rate also prevents capital flow.

Additionally, it provides a more efficient environment that can enhance the expansion of world trade. This is because it constrains speculations to the minimum limit (Corsetti et al., 2017). On the other side, the fixed exchange rate system is characterized by fear for devaluation. You see, when there is excess demand, the central bank will utilize its reserves to sustain foreign exchange rate, and however, when the reserves are depleted, and the application is still on course, the government will be compelled to devalue the domestic currency. Now, if the speculators are convinced that the exchange rate cannot be sustained for long, they will buy foreign exchange in a large amount resulting in a deficit in the balance of payments. Indeed, this the major setback that is connected to the fixed exchange rate system. Again, with this system of the exchange rate, the merits are a free market is limited and thus chances of under-valuation or over-valuation are very high.

Floating Exchange Rate System

Just like the fixed exchange rate system, floating (flexing) exchange rate system also has its merits and demerits. One of the advantages of this system is that the balance of payments deficit or surplus is automatically corrected. Again, with this system, the government doesn't have to reserve any foreign exchange (Komekbayeva et al., 2016). Floating exchange rate system also allows for optimum resource allocation. Lastly, with this system of the exchange rate, the government is waivered the burden of issues with the balance of payment. On the other hand, the floating exchange rate system is associated with a wide range of speculations in the foreign exchange rate. As a result, there would be a high rate of fluctuation would significantly interfere with international trade and capital movement.

Now, to salvage a country from short-term volatility from exchange emerged by financial speculations and shock, the floating exchange rate can be adjusted gradually and deliberately by the central bank, to affect the price of its currency in regards to that of other countries. So, if the central bank manipulates free to exchange to the advantage of the country, and the disadvantage of the other countries, this will be referred to as "Dirty floating." The banks have no specified times for intervention; however, there are sets of rules that govern them.

Ethical Issues Are Associated With Exchange Rates

When companies engage in businesses in their home country, a good number of their staff will have the same culture as the customers since they come from a common area and thus they share similar social and ethical values. Social and ethical concerns (Jondle, & Ardichvili, 2017). Great ethical concerns will emerge when companies engage in foreign markets. With the international markets, company staff and the customers come from cultures that may ultimately have different social and ethical standards. Therefore, companies must have strategic, noble plans to address the potential concern in foreign markets; the companies have to respect the international markets ethical practices. So as much as foreign exchange trade in concerned, many ethical standards must be considered by the member countries of companies. In an international market, the choices of the soft peg, hard peg, and floating arrangements must be within the provision of specific ethical standards. I will explore the ethical issues that are associated with exchange rates.

Operations Ethics

Companies that want to engage in foreign exchange rates must establish specific local operating systems. To participate in an international market, one must be ready to be involved in activities that can be considered moral or immoral at home. For instance, a company must provide a good working environment or respect contractual conditions, etc. Again, to match the culture of many customers in foreign markets, companies will be required to hire natives as well. This is a matter that much small business are experiencing now; they lack capacities to employ the locals. As a result, such a company has closed since the native customers characterize them with immoral and unethical standards, with regards to their own.

Free Speech

While companies are required to encourage free speech in international markets, they must as well, watch on their freedom of speech. They must make sure that their freedom of speech and that of customers are in line. This is because countries can execute legal measures on companies and individuals engaging in prohibited communications. So to avoid such consequences, they must operate within the provision of specified international market laws (Jondle, & Ardichvili, 2017).

Taxations

When issues of taxation in foreign entities is discussed, what should come in our mind is the way companies balance costs and revenues between their home and international markets. Indeed, this matter has been a source of ethical concern. Foreign markets afford business low-tax jurisdiction that has enabled even some of them to evade taxes. However, they gain high profits. This is unethical and questionable (Komekbayeva et al., 2016). Companies should establish standardized regulations to control how they distribute the costs and revenues between home and foreign operations.

Bribery

According to some cultures, asking for gifts, commissions or favor for affording contacts or business ideas is normal in certain countries; however, in some, this is illegal. Some individuals will request large sums of money, and in this case, it will be pure bribery (Jondle, & Ardichvili, 2017). Now, this is one ethical issue that companies must be aware of before they engage in international trading. For instance, America laws prohibit companies from paying bribes, and the consequences may be a shut-down for both home and foreign countries.

Marketing

Companies have the authority to influence their customers through marketing. They may hire other small companies to do marketing for them. In this case, it is their responsibility to make sure that such companies use that marketing power positively; the marketing strategies must meet the moral and ethical standards (Mihaela, 2017). Even if they decide to do it of their own, such companies must as well follow suit.

Conclusion

So, among the four major ethical issues associated with international businesses, operation ethics is quite significant (Jondle, & Ardichvili, 2017). To build a company`s reputation in the international market, proper operational strategies must be set. A good approach in this context should cater to the needs, opinions, and satisfaction of native customers. This will enhance the relationship between a business and a state as well as the native customers. While a wise decision on the hard peg, soft peg, and floating management may be critical for a company involving international business, ethics is the outer picture that determines the definition of a company businesswise. In many circumstances, when a proper operation ethical strategies are installed in a company, other ethical issues discussed above will automatically be catered for.

References

Corsetti, G., Kuester, K., & Muller, G. J. (2017). Fixed on flexible: rethinking exchange rate regimes after the Great Recession. IMF Economic Review, 65(3), 586-632.

Jondle, D., & Ardichvili, A. (Eds.). (2017). Ethical Business Cultures in Emerging Markets. Cambridge University Press.

Komekbayeva, L. S., Legostayeva, A. A., Tyan, O. A., & Orynbassarova, Y. D. (2016). Government Measures for Economic Support in the Conditions of a Floating Exchange Rate of the National Currency. International Electronic Journal of Mathematics Education, 11(7), 2227-2237.

Mihaela, G. (2017). International experience in implementing enterprise process redesign. Quality-Access to Success, 18.