How Exchange Rate and Interest Rate Affect Hong Kong Market
In 1983, Hong Kong implemented Fixed-linkage System to US currency because of the reason that Hong Kong currency was very unstable. This Fixed-linkage System is a fixed exchange rate system that fixes the exchange rate of Hong Kong Dollar and United State Dollar to a ratio of 7.8: 1 Hong Kong Monetary Authority does not need to stable exchange market by controlling the supply and demand of HKD. It can be stabilized by Fixed-linkage System.
In the past 15 years, Hong Kong interest rates and exchange rates fluctuated in the same trend of the US interest rate and exchange rate. The graphs below show an example of interest rate and exchange rate respectively:
[pic]
[pic]
We can see that their trends and fluctuations are normally the same. In this report, we describe how this Fixed-linkage System affects the Hong Kong economy, the stock markets and the property markets.
Hong Kong Economy
Indicator:
i) GDP:
To measure the economic condition of Hong Kong throughout the 15 years, Gross Domestic Product (GDP) is the indicator we used.
GDP is defined as ‘the market value of all final goods and services produced within a country in a given period of time.’ (#1) It measures the total spending on goods and services in all markets in the economy.
GDP (Y) is constituted by four elements, namely Consumption ( C ), Investment (I), Government Purchases(G), and the Net Exports(NX); Their relationships are denoted by the following equation:
Y = C + I + G + NX
Consumption is the households’ spending on goods and services except housing;
Investment is the spending on goods which will be used to produce more goods and services; Government Purchase is the expenditure on goods and services by the local government;
Net Exports is the difference between the exports and the imports.
[pic]
Graph 1
Chain Volume Measures of GDP is a more accurate measure of GDP using effective average volume for the goods and services produced by a region in a
In the past 15 years, Hong Kong interest rates and exchange rates fluctuated in the same trend of the US interest rate and exchange rate. The graphs below show an example of interest rate and exchange rate respectively:
[pic]
[pic]
We can see that their trends and fluctuations are normally the same. In this report, we describe how this Fixed-linkage System affects the Hong Kong economy, the stock markets and the property markets.
Hong Kong Economy
Indicator:
i) GDP:
To measure the economic condition of Hong Kong throughout the 15 years, Gross Domestic Product (GDP) is the indicator we used.
GDP is defined as ‘the market value of all final goods and services produced within a country in a given period of time.’ (#1) It measures the total spending on goods and services in all markets in the economy.
GDP (Y) is constituted by four elements, namely Consumption ( C ), Investment (I), Government Purchases(G), and the Net Exports(NX); Their relationships are denoted by the following equation:
Y = C + I + G + NX
Consumption is the households’ spending on goods and services except housing;
Investment is the spending on goods which will be used to produce more goods and services; Government Purchase is the expenditure on goods and services by the local government;
Net Exports is the difference between the exports and the imports.
[pic]
Graph 1
Chain Volume Measures of GDP is a more accurate measure of GDP using effective average volume for the goods and services produced by a region in a