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Money and credit - Ivanov V.M.

Theme 13. CURRENCY AND CURRENCY RATE

13.1. Convertibility

From a legal point of view, a currency that is freely exchanged for all other currencies is considered to be freely convertible. This means that residents should have the right to freely purchase the foreign currency necessary for making current payments, and non-residents should be able to purchase local currency and use it to make current payments within the country or freely exchange it for foreign currency. There are such types of currency convertibility :

• internal (resident) - the ability to exchange national currency for foreign for residents of a given country;

• current - the ability to exchange currencies for the purpose of making payments under the current items of the balance of payments. This is a good means of liberalizing foreign trade, leading to the emergence of real competition and ensuring the conformity of domestic and world prices, which is necessary to increase the efficiency of production and investment. In the absence of import restrictions, current convertibility contributes to the growth of individual consumption at the expense of foreign goods. But increased competition and rationalization of production can lead to an increase in unemployment and unused production capacities, while the level of real wages is significantly reduced;

• capital - the ability to exchange currencies in order to increase solvency under the items of movement of funds and loans;

• full - a real opportunity for residents and non-residents to exchange this currency for foreign currency for any purpose;

• free - insignificant regulation by the administration of the exchange procedure;

• limited - the reverse is free - the administration has introduced strict rules or quantitative restrictions on currency exchange.

Stable convertibility of the currency indicates the stable state of the economy. Full convertibility is ensured if the country reaches the level of economic development inherent in the United States, Japan and Western European countries. The introduction of convertibility requires these three conditions:

• pricing by the market method in conditions of tolerable inflation;

• lack of a system of universal subsidies for goods and services;

• price elasticity on demand and supply.