GMS 724 Chapter Notes - Chapter 9: U.S. Route 33, Black Market, United States Dollar
30 Jan 2019
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Chapter 9: Determining Exchange Rates: Part 5
Black Markets
• In many of the countries that do not allow their currencies to float according to
market forces, a black market can parallel the official market and be aligned
more closely with the forces of supply and demand than the official market
o The less flexible a country's exchange rate-arrangement, the more likely
there will be a thriving black (or parallel) market
o A black market exists when people are willing to pay more for dollars than
the official rate
o In order for such market to work the government must control access to
foreign exchange so it can control the price of currency
• One example of black market transactions occurred in Shenzhen, China, in 2000
when people who were worried about the future value of the Chinese yuan
bought Hong Kong dollars on the black market
o Some people even figure out that the demand for Hong Kong dollars was
so high that they could buy them at state banks and make a tidy profit by
selling them to other who could not get access to them
• Zimbabwe's terrible financial problems are manifest in the currency markets
o Its official currency regime is a soft-peg arrangement and used to be
pegged to the U.S. dollar, but that didn't seem to have helped much
o In 2007, with the inflation hitting around 4,500 percent---the highest in the
world---the currency was plunging
o A loaf of bread cost 44,000 Zimbabwean dollars, which was only 18 cents
at black-market rates but $176 at the official exchange rate
o By early 2009, the economy was still a disaster, and the country was
suffering from a cholera epidemic and political turmoil
o Hyperinflation was so bad that the central bank issues a $100 trillion
banknote that was worth about U.S. $33 on the black market
o Prices were doubling every day, and food and fuel were in short supply
o In spite of the official exchange rate, most people were trading currency at
the black-market rate
• Even oil-rich Venezuela has black market problems
o Sometimes the markets are illegal, and sometimes they are essential part
of the economy
o Although Venezuela has an official ban against private firms buying and
selling currency at black market rates, it relies on black-market trading
houses to keep currency in the market
o When oil prices fell in the latter part of 2008, a liquidity crisis hit Venezuela
and the finance ministry and state-owned oil company began selling them
to continue operations
Document Summary
Its official currency regime is a soft-peg arrangement and used to be pegged to the u. s. dollar, but that didn"t seem to have helped much. In 2011, however, the government moved to one exchange0rate regime as a conventional peg system with the u. s. dollar as the anchor currency: through the first half of 2011, the exchange rate remained unchanged at. 4. 3500 per dollar, so it was maintaining its peg: however, the black market in 2011, though illegal, was still live and well with black market rates nearly double the official rate. Foreign-exchange convertibility and controls: some countries with fixed exchange rates control access to their currencies, fully convertible currencies are those that the government allows both residents and nonresidents to purchase in unlimited amounts. It"s interesting to note that many developing countries dominate the list of nations with the highest foreign-exchange reserves.
