ions in the United States, but as a result of the stability (or instability) ofthe exchange rate in other countries as well. A floating exchange rate works well in theU.S. because of the strength of the dollar. However, some countries have attempted touse an adjustable peg system, in which their currency is adjusted to that of a largereconomy, with the option to adjust when underlying conditions change. This system hasnot proven to be beneficial, as in the cases of Brazil and Russia in 1998-99. Both of thesecountries experienced exchange-rate overvaluations and were forced to abandon theircurrent exchange system. 5 This trend can be seen in the chart below. The economiccrisis in Russia began to unfold in August of 1998, at the same time that the Ruble wasdecreasing in value. As the Ruble became increasingly overvalued, the Russian economyexperienced more strain. This kind of economic crisis leads to an increase in importsfrom these countries and a decrease in exports. Source: 1999 Country Report on Economic Policy and Trade PracticesExchange Rates and Their Affect on TradeThe exchange rate is one of the leading factors when countries decide what products andservices to import and what products and services to export. While it is not the onlyfactor that is considered, the exchange rate affects the ratio of the prices and allowscountries to decide whether it would be profitable or not to import or export certaingoods. For example, if the United States was considering trade with the U.K., fourfactors would be considered when determining which products would be imported andwhich products would be exported: 1) the price of the goods in U.S. dollars, 2) the priceof the goods in U.K. pounds, 3) the U.K. price in dollars at the exchange rate, and 4) theratio of the U.S. price to the U.K. price. The following chart illustrates the hypotheticalcost to sell soybeans, gloves, and stereos in the U.S. compared to the U.K. Using thec...
