Contents | Bottom | Lesson | Home

Activity 29, The Global Economy: The World Monetary System

Cash Before You Go: $1 Equals...

Rates paid to individuals exchanging cash in the United States, not including service fees.  Rates for cash are usually more favorable abroad, as are rates for credit card purchases and traveler's checks.
Source: Thomas Cook Foreign Exchange

Exercise B: Currency Equivalents and Changing Money

In the US and around the world, money can be changed from one currency to another at most commercial banks.  In New York City, for example, you can exchange a US dollar bill for Brazilian cruzeiros, Italian lire or Sri Lankan rupees at most large banks.  The rates of exchange change daily.  The exchange rate tells you how much foreign money is required to buy an American dollar.  Banks will charge a small commission for this service.  New York City is an international banking center.  By 1991, foreign banks had 463 offices in New York City, and New York's own banks and financial institutions, such as American Express, Citibank, and Chase Manhattan, have branches around the world.  Changing money is only one of a number of services that banks perform in today's global economy.

Reflect the Currency Chart.  It indicate what the American dollar and other currencies are worth on a certain day.  The currencies change in value daily, so that world events, or crises in the money markets of the world, may have serious effects on the value of money on any one day.

Given this information, how would you respond to each of these situations?

• Your cousin in Brazil sent you a record for Christmas.  You noticed the price tag was still on the record.  It cost 7,160 cruzeiros.  You want to send a gift in return that costs about the same amount in US dollars What will you have to spend?
• You want to order a sweater shown in a catalogue from a store in London, Great Britain.  In the catalogue the price of the sweater is 20 pounds.  About how many dollars will it cost you?
• You are traveling in Mexico.  You can only afford to spend $15 a night on a hotel.  You have just arrived at a hotel and notice a list of prices-single rooms start at $1,578 a night.  The hotel desk clerk notices your look of shock and explains that in Mexico the "$" means "pesos." Can you afford the room?

Exercise C: Asian Economic Crisis

As a result of the Asian economic crisis, the Port Authority of New York and New Jersey experienced a 7% increase in imports and a 7% decrease in exports to the Far East.  This is because items imported from the Far East were cheaper, so we purchased more.  Conversely, they could not afford to purchase our goods, so exports to the region dropped.

As a result of all of the information above, how would you respond to the following:

• Will the value of the dollar goes up or down if the following events take place?  Explain your answer.
• More people in other countries want to buy computers and video games made in the US
• More foreign tourists travel in the US
• People in other countries stop buying US-made cars and buy Japanese ones instead.
• Americans start spending more money on imported clothes, televisions and cameras.

Exercise D: Changes in the Value of the Dollar

A change in the value of the US dollar on international currency markets could make imports (like a Sony Walkman) much cheaper or it could make them more expensive.  Changes in the dollar's value in relation to foreign currencies could make a vacation in the Bahamas much cheaper or more expensive.  A change in the value of the dollar could even cause thousands of Americans to lose their jobs, or it could create thousands of new jobs in New York and the rest of the United States.

What happens if the value of the dollar drops considerably?  Does this mean problems for Americans?  Actually, some Americans would benefit; others might face problems.  It depends on how each individual's job and purchases are connected to the world economy.

Given all of the information above, how would you respond to the following:¹

• The value of the dollar has dropped significantly in relation to most foreign currencies.  Can you explain why each of the five people described here are happy or sad?
• A person who wanted to buy a new Sony VCR made in Japan.
• A garment worker in a clothing factory.
• An American who wanted to travel to Israel.
• A French salesperson selling IBM computers (made in US) in Paris (he is paid a salary in French francs).
• A worker in an American automobile factory who finds out he is laid off.

¹ A drop in the value of the dollar makes imports more expensive, which explains the feelings of persons #1 and #2.  Travel abroad becomes more expensive for person #3.  US exports become cheaper for foreigners to buy so person #4 will improve his sales record (but not his earnings since his salary would remain the same).  Person #5 is happy both because imported cars will now cost Americans more and because US cars will now be cheaper for foreigners to buy; this increase in the demand for US cars means he probably won't be laid off after all.  An increase in the value of the dollar would have effects exactly opposite to those described above.  In general, persons who are employed in producing, shipping or selling exports would be hurt by an increase in the value of the dollar as would persons producing goods facing competition from imports.  On the other hand, persons who are consumers of goods made abroad or who travel frequently in foreign countries would benefit from an increase in the dollar's value in relation to other currencies.  Whether an individual gains or suffers losses depends on how that particular person is linked to the global economy.

Contents | Top | Lesson | Home