Naked Economics: Undressing the Dismal Science - For Chapters 11-Epilogue Summary & Analysis

Charles Wheelan
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In Chapter 11, the author discusses the ERM. The European Exchange Rate Mechanism (ERM) is an agreement designed to manage exchange rates and large fluctuations between European nations. It creates targets for exchange rates that governments are obligated to trade around. International transactions should be the same as economics within the country, yet they are more complex. Monetary value fluctuates within a country. The exchange rate is used to keep currency fair in international trading. The interesting thing is that official exchange rates deviate wildly from what purchasing power parity would predict. The reason for this lies in the distinction between services and goods that are tradable versus those that are not tradable.

There are several mechanisms used in order to value currencies against each other. The gold standard is one that was employed in the past where in countries equated their...

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