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South Africa vs Venezuela - Essay Example

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Name: Course: Instructor: Date: South Africa vs. Venezuela Introduction Foreign direct investment (FDI) requires careful thought before making a decision as changes in the external value of the domestic currency leads to changes in the real value of an investment…

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South Africa vs Venezuela

In addition to other factors this situation implies that maintaining a fixed exchange rate between both countries will be extremely difficult. In fact, Husted and Melvin (2010) indicate that one of the benefits of adopting a flexible exchange rate is that countries are able to formulate their own monetary policies and the rate of exchange will automatically adjust for differentials in the inflation rates. With an exchange rate peg, as exists in Venezuela, the central bank adjusts supply of foreign exchange in order to maintain the peg with the United States dollar. The graph below shows the changes in the exchange rate between the US$ and the South African Rand and the Venezuelan VER from 2006 to 2010. Figure 1 The information in Figure 1 indicates that the rate of exchange between the US dollar and the Rand ranged from a low of ZAR 6. 49 in 2006 to ZAR 8.42 to US$1 in the case of the South African currency and in the case of the Venezuelan Bolivar from a low of VER 2.147 to a high of VER4.3039. This is because of the differences in the exchange rate policies of the two countries. Although, the exchange rate has been stable for the most part in Venezuela there are obvious instabilities in the macroeconomic policies of the Venezuelan Government. ...
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