In a common currency). For example, if the us price level rises by 10 percent but the European

price level by only 5 percent, the PPP value of the European price should appreciate by approximately

5 Percent. Change in the relative values of the two currencies compensates exactly for differences in

national inflation rates. If indeed the actual exchange rate equals the PPP rate, the competitive positions

of firms in the two countries will remain unchanged. American firms, even though domestically

facing a higher inflation rate, will still be able to sell their output to Europe just as before because the

exchange rate will have adjusted to offset the effect of higher US prices.

The PPP theory seems to work well in the long run when the differences in inflation rates between

two countries are relatively large. When such inflation rate differences are not big, other,

market-oriented forces enter.

Vocabulary Notes to Text 6.7.1.2

1. purchasing power parity — паритет покупательной способности

2. to reflect — отражать

3. relative changes — относительные изменения

4. to offset — возмещать (компенсировать)

5. value — значение

90

6.7.1.3. Read and translate the text “From Exchange Control Practice” and make an account

o f how it is exercised.

From Exchange Control Practice

Exchange control is universal for the majority of developed countries. What is the exchange

сontrol?

It is the control by the state through the banking system of dealings in gold and foreign currencies.

Exchange control is concerned with controlling the purchase and sale of currencies by residents

alone, since governments do not have complete powers to control the activities of non-resi

dents. This must be done through the market and is a matter of exchange management (exchange

equalization account). Exchange control is required only where a country wishes to influence the

international value of its currency. It is not willing to leave the value of its currency in terms of other

currencies or gold to be determined in the free market, as it would be under a system of floating

exchange rates, or to allow the fixed external value of its currency to be the determinant of the

domestic price level. In its most extreme form, a country facing a balance-of-payments deficit may

use exchange control to restrict imports to the amount earned in foreign exchange by its nationals.

All forms of exchange control are discouraged by the Organization for Economic Cooperation and

Development and other international organizations concerned with encouraging international trade.

should be noted that a currency is not fully convertible when exchange control is operated.

Exchange controls were introduced in the UK at the beginning of the Second World War and

embodied in the Exchange Control Act of 1947. These controls were abolished in 1979. Within the

European Union exchange controls were made generally illegal by the Single European Act.

Vocabulary Notes to Text 6.7.1.3

1 . the banking system of dealings — банковская система сделок

2. controlling the purchase and sale of currencies by residents alone — контроль (регулирование)

покупки и продажи валют только резидентами

3 . the domestic price level — уровень цены на внутреннем рынке

4. a balance-of-payments deficit — дефицит баланса платежей

6.7.1.4. Read and translate the text “Exchange Equalization Account in the UK” in written form.

By exchange equalization account (UK) we mean an account controlled by the Treasury and

managed by the Bank of England which buys and sells sterling for gold and foreign currencies with

the potential object of offsetting major fluctuations in the exchange value of the pound and keeping

th e spot market price for the pound around some required rate. The account was set up by the 1932

finance Act after the abandonment of the gold standard in the previous year. The assets of the

account include the gold and foreign exchange reserves and sterling, provided by the Exchequer,