Dan Brown's New Book to be released soon

List of Phobias

I am giving here the complete list of Phobias. There is every chance of asking one of these in the Prelims of Group I. Just go through all of these to have an idea, you need not mug up. You will have the advantage of answering by elimination process if you read these once.


Ablutophobia - Fear of washing or bathing.
Acarophobia - Fear of itching or of the insects that cause itching.
Acerophobia - Fear of sourness.
Achluophobia - Fear of darkness.
Acousticophobia - Fear of noise.
Aeroacrophobia - Fear of open high places.
Aeronausiphobia - Fear of vomiting secondary to airsickness.
Aerophobia - Fear of drafts, air swallowing, or airborne noxious substances.
Agliophobia - Fear of pain.
Agoraphobia - Fear of open spaces or of being in crowded, public places like markets. Fear of leaving a safe place. Fear of crowds.
Agraphobia - Fear of sexual abuse.
Agrizoophobia - Fear of wild animals.
Agyrophobia - Fear of streets or crossing the street.
Aichmophobia - Fear of needles or pointed objects.
Ailurophobia - Fear of cats.
Albuminurophobia - Fear of kidney disease.
Alektorophobia - Fear of chickens.
Algophobia - Fear of pain.
Alliumphobia - Fear of garlic.
Allodoxaphobia - Fear of opinions.
Altophobia - Fear of heights.
Amathophobia - Fear of dust.
Amaxophobia - Fear of riding in a car.
Ambulophobia - Fear of walking.
Amnesiphobia - Fear of amnesia.
Amychophobia - Fear of scratches or being scratched.
Anablephobia - Fear of looking up.
Ancraophobia - Fear of wind.
Androphobia - Fear of men.
Anemophobia - Fear of air drafts or wind.
Anemophobia - Fear of wind.
Anginophobia - Fear of angina, choking of narrowness.
Anglophobia - Fear of England, English culture, ect.
Angrophobia - Fear of becoming angry.
Ankylophobia - Fear of immobility of a joint.
Anthophobia - Fear of flowers.
Anthrophobia - Fear of flowers.
Anthropophobia - Fear of people of society.
Antlophobia - Fear of floods.
Anuptaphobia - Fear of staying single.
Apeirophobia - Fear of infinity.
Aphenphosmphobia - Fear of being touched.
Apiphobia - Fear of bees.
Apotemnophobia - Fear of persons with amputations.
Arachibutyrophobia - Fear of peanut butter sticking to the roof of the mouth.
Arachnephobiba - Fear of spiders.
Arachnophobia - Fear of spiders.
Arithmophobia - Fear of numbers.
Arrhenophobia - Fear of men.
Arsonphobia - Fear of fire.
Ashenophobia - Fear of fainting or weakness.
Astraphobia - Fear of thunder and lightning.
Astrapophobia - Fear of thunder and lightning.
Astrophobia - Fear of stars and celestial space.
Asymmetriphobia - Fear of asymmetrical things.
Ataxiophobia - Fear of ataxia (muscular incoordination)
Ataxophobia - Fear of disorder or untidiness.
Atelophobia - Fear of imperfection.
Atephobia - Fear of ruin or ruins.
Athazagoraphobia - Fear of being forgotten or ignored or forgetting.
Atomosophobia - Fear of atomic explosions.
Atychiphobia - Fear of failure.
Aulophobia - Fear of flutes.
Aurophobia - Fear of gold.
Auroraphobia - Fear of Northern Lights.
Autodysomophobia - Fear that one has a vile odor.
Automatonophobia - Fear of ventriloquist's dummies, animatronic creatures, wax statues anything that falsely represents a sentient being.

Automysophobia - Fear of being dirty.
Autophobia - Fear of being alone or of oneself.
Aviatophobia - Fear of flying.
Aviophobia - Fear of flying.


Bacillophobia - Fear of microbes
Bacteriophobia - Fear of bacteria.
Balenephobia - Fear of pins and needles.
Ballistophobia - Fear of missles or bullets.
Barophobia - Fear of gravity.
Basiphobia - Inability to stand. Fear of walking or falling.
Basophobia - Inability to stand. Fear of walking or falling.
Bathophobia - Fear of depth.
Batonophobia - Fear of plants.
Batophobia - Fear of heights or being close to high buildings.
Batrachophobia - Fear of amphibians, such as frogs, newts, salamanders, etc.
Bibliophobia - Fear of books.
Blennophobia - Fear of slime.
Bogyphobia - Fear of bogies or the bogeyman.
Bolshephobia - Fear of Bulsheviks.
Bromidrophobia - Fear of body smells.
Bromidrosiphobia - Fear of body smells.
Brontophobia - Fear of thunder and lightning.
Bufonophobia - Fear of toads.


Cacophobia - Fear of ugliness.
Cainophobia - Fear of newness, novelty.
Cainotophobia - Fear of newness, novelty.
Caligynephobia - Fear of beautiful women.
Cancerophobia - Fear of cancer.
Carcinophobia - Fear of cancer.
Cardiophobia - Fear of the heart.
Carnophobia - Fear of meat.
Catagelophobia - Fear of being ridiculed.
Catapedaphobia - Fear of jumping from high and low places.
Cathisophobia - Fear of sitting.
Catoptrophobia - Fear of mirrors.
Cenophobia - Fear of new things or ideas.
Centophobia - Fear of new things or ideas.
Ceraunophobia - Fear of thunder.
Chaetophobia - Fear of hair.
Cheimaphobia - Fear of cold.
Cheimatophobia - Fear of cold.
chemophobia - Fear of chemicals or working with chemicals.
Cherophobia - Fear of gaiety.
Chionophobia - Fear of snow.
Chiraptophobia - Fear of being touched.
Cholerophobia - Fear of anger or the fear of cholera.
Chorophobia - Fear of dancing.
Chrematophobia - Fear of money.
Chromatophobia - Fear of colors.
Chrometophobia - Fear of money.
Chromophobia - Fear of colors.
Chronomentrophobia - Fear of clocks.
Chronophobia - Fear of time.
Cibophobia - Fear of food.
Claustrophobia - Fear of confined spaces.
Cleisiophobia - Fear of being locked in an enclosed place.
Cleithrophobia - Fear of being enclosed.,br> Cleithrophobia - Fear of being locked in an enclosed place.

Cleptophobia - Fear of stealing.
Climacophobia - Fear of stairs, climbing or of falling downstairs.
Clinophobia - Fear of going to bed.
Clithrophobia - Fear of being enclosed.
Cnidophobia - Fear of strings.
Coimetrophobia - Fear of cemeteries.
Coitophobia - Fear of coitus.
Cometophobia - Fear of comets.
Contreltophobia - Fear of sexual abuse.
Coprastasophobia - Fear of constipation.
Coprophobia - Fear of feces.
Coulrophobia - Fear of clowns.
Counterphobia - The preference by a phobic for fearful situations.
Cremnophobia - Fear of precipices.
Cryophobia - Fear fo extreme cold, ice or frost.
Crystallophobia - Fear of crystals or glass.
Cyberphobia - Fear of computers or working on a computer.
Cyclophobia - Fear of bicycles.
Cymophobia - Fear of waves or wave like motions.
Cynophobia - Fear of dogs or rabies.
Cyprianophobia - Fear of prostitutes or venereal disease.
Cypridophobia - Fear of prostitutes or venereal disease.
Cyprinophobia - Fear of prostitutes or venereal disease.
Cypriphobia - Fear of prostitutes or venereal disease.


Daemonophobia - Fear of demons.
Decidophobia - Fear of making decisions.
Defecaloesiphobia - Fear of painful bowels movements.
Deipnophobia - Fear of dining and dinner conversation.
Dematophobia - Fear of skin lesions.
Dementophobia - Fear of insanity.
Demonophobia - Fear of demons.
Demophobia - Fear of crowds.
Dendrophobia - Fear of trees.
Dentophobia - Fear of dentist.
Dermatophathophobia - Fear of skin disease.
Dermatophobia - Fear of skin disease.
Dermatosiophobia - Fear of skin disease.
Dextrophobia - Fear of objects at the right side of the body.
Diabetophobia - Fear of diabetes.
Didaskaleinophobia - Fear of going to school.
Diderodromophobia - Fear of trains, railroads or train travel.
Dikephobia - Fear of justice.
Dinophobia - Fear of dizziness or whirlpools.
Diplophobia - Fear of double vision.
Dipsophobia - Fear drinking.
Dishabiliophobia - Fear of undressing in front of someone.
Domatophobia - Fear of houses or being in a home.
Doraphobia - Fear of fur or skins of animals
Dromophobia - Fear of crossing streets.
Dutchphobia - Fear of the Dutch.
Dysmorphophobia - Fear of deformity.
Dystychiphobia - Fear of accidents.


Ecclesiophobia - Fear of church.
Ecophobia - Fear of home.
Eicophobia - Fear of home surroundings.
Eisoptrophobia - Fear of mirrors or of seeing oneself in a mirror.
Electrophobia - Fear of electricity.
Eleutherophobia - Fear of freedom.
Elurophobia - Fear of cats.
Emetophobia - Fear of vomiting.
Enetophobia - Fear of pins.
Enissophobia - Fear of having committed an unpardonable sin or of criticism.
Enochlophobia - Fear of crowds.
Enosiophobia - Fear of having committed an unpardonable sin or of criticism.
Entomophobia - Fear of insects.
Eosophobia - Fear of dawn or daylight.
Epistaxiophobia - Fear of nosebleeds.
Epistemphobia - Fear of knowledge.
Equinophobia - Fear of hourse.
Eremophobia - Fear of being oneself or of lonliness.
Ereuthophobia - Fear of redlights. Fear of blushing. Fear of red.
Ereuthrophobia - Fear of blushing.
Ergasiophobia - Fear of work or functioning. Surgeon's fear of operating.
Ergophobia - Fear of work.
Erotophobia - Fear of sexual love or sexual questions.
Erythrophobia - Fear of redlights. Fear of blushing. Fear of red.
Erytophobia- Fear of redlights. Fear of blushing. Fear of red.
Euphobia - Fear of hearing good news.
Eurotophobia - Fear of female genitalia.


Febriphobia - Fear of fever.
Felinophobia - Fear of cats.
Fibriophobia - Fear of fever.
Fibriphobia - Fear of fever.
Francophobia - Fear of France, French culture.


Galeophobia - Fear of cats.
Galiophobia - Fear of France, French culture.
Gallophobia - Fear of France, French culture.
Gamophobia - Fear of marriage.
Gatophobia - Fear of cats.
Geliophobia - Fear of laughter.
Geniophobia - Fear of chins.
Genophobia - Fear of sex.
Genuphobia - Fear of knees.
Gephydrophobia - Fear of crossing bridges.
Gephyrophobia - Fear of crossing bridges.
Gephysrophobia - Fear of crossing bridges.
Gerascophobia - Fear of growing old.
Germanophobia - Fear of Germany, German culture, etc.
Gerontophobia - Fear of old people or of growing old.
Geumaphobia - Fear of taste.
Geumophobia - Fear of taste.
Gnosiophobia - Fear of knowledge.
Graphophobia - Fear of writing or handwritting.
Gymnophobia - Fear of nudity.
Gynephobia - Fear of women.
Gynophobia - Fear of women.


Hadephobia - Fear of hell.
Hagiophobia - Fear of saints or holy things.
Hamartophobia - Fear of sinning.
Haphephobia - Fear of being touched.
Haptephobia - Fear of being touched.
Harpaxophobia - Fear of being robbed.
Hedonophobia - Fear of feeling pleasure.
Heliophobia - Fear of the sun.
Hellenologophobia - Fear of Greek terms or complex scientific terminology.
Helminthophobia - Fear of being infested with worms.
Hemaphobia - Fear of blood.
Hematophobia - Fear of blood.
Hemophobia - Fear of blood.
Hereiophobia - Fear of challenges to official doctrine or of radical deviation..
Heresyphobia - Fear of challenges to official doctrine or radical deviation.
Herpetophobia - Fear of reptiles or creepy, crawly things.
Heterophobia - Fear of the opposite sex.
Hierophobia - Fear of priest or sacred things.
Hippophobia - Fear of horses.
Hippopotomonstrosesquippedaliophobia - Fear of long words.
Hobophobia - Fear of bums or beggars.
Hodophobia - Fear of road travel.
Homichlophobia - Fear of fog.
Homilophobia - Fear of sermons.
Hominophobia - Fear of men.
Homophobia - Fear of sameness, monotony or of homosexuality or of becoming homosexual.
Hoplophobia * Fear of firearms.
Hormephobia - Fear of shock.
Hydrargyophobia - Fear of mercuial medicines.
Hydrophobia - Fear of water of of rabies.
Hydrophobophobia - Fear or rabies.
Hyelophobia - Fear of glass.
Hygrophobia - Fear of liquids, dampness, or moisture.
Hylephobia - Fear of materialism or the fear of epilepsy.
Hylophobia - Fear of forests.
Hynophobia - Fear of sleep or of being hypnotized.
Hypegiaphobia - Fear of responsibility.
Hypengyophobia - Fear of responsibility.
Hypsiphobia - Fear of height.


Iatrophobia - Fear of going to the doctor or doctors.
Ichthyophobia - Fear of fish.
Ideophobia - Fear of ideas.
Illyngophobia - Fear of vertigo or feeling dizzy when looking down.
insectophobia - fear of insects.
Iophobia - Fear of poison.
Isolophobia - Fear of solitude, being alone.
Isopterophobia - Fear of termites, insects that eat wood.
Ithyphallophobia - Fear of seeing, thinking about, or having an erect penis.


Japanophobia - Fear of Japanese.
Judeophobia - Fear of Jews.


Kainolophobia - Fear of novelty.
Kainophobia - Fear of anything new, novelty.
Kakorrhaphiophobia - Fear of failure or defeat.
Katagelophobia - Fear of ridicule.
Kathisophobia - Fear of sitting down.
Kenophobia - Fear of voids or empty spaces.
Keraunophobia - Fear of thunder and lightning.
Kinesophobia - Fear of movement or motion.
Kinetophobia - Fear of movement or motion.
Kleptophobia - Fear of movement or motion.
Koinoniphobia - Fear of rooms.
Kolpophobia - Fear of genitals, particulary female.
Koniophobia - Fear of dust.
Kopophobia - Fear of fatigue.
Kosmikophobi - Fear of cosmic phenomenon.
Kymophobia - Fear of waves.
Kynophobia - Fear of rabies.
Kyphophobia - Fear of stooping.


Lachanophobia - Fear of vegitables.
Laliophobia - Fear of speaking.
Lalophobia - Fear of speaking.
Lepraphobia - Fear of leprosy.
Leprophobia - Fear of leprosy.
Leukophobia - Fear of the color white.
Levophobia - Fear of things to the left side of the body.
Ligyrophobia - Fear of loud noises.
Lilapsophobia - Fear of tornadoes and hurricanes.
Limnophobia - Fear of lakes.
Linonophobia - Fear of string.
Liticaphobia - Fear of lawsuits.
Lockiophobia - Fear fo childbirth.
Logizomechanophobia - Fear of computers.
Logophobia - Fear of words.
Luiphobia - Fear of lues, syphillis.
Lutraphobia - Fear of otters.
Lygophobia - Fear of darkness.
Lysssophobia - Fear of rabies or of becoming mad.


Macrophobia - Fear of long waits.
Mageirocophobia *- Fear of cooking.
Maieusiophobia - Fear of childbirth.
Malaxophobia - Fear of love play.
Maniaphobia - Fear of insanity.
Mastigophobia - Fear of punishment.
Mechanophobia - Fear of machines.
Medomalacuphobia - Fear of losing an erection.
Medorthophobia - Fear of an erect penis.
Megalophobia - Fear of large things.
Melanophobia - Fear of the color black.
Melissophobia - Fear of bees.
Melophobia - Fear of hatred or music.
Meningitiophobia - Fear of brain disease.
Merinthophobia - Fear of being bound or tied up.
Mertophobia - Fear or hatred of poetry.
Metallophobia - Fear of metal.
Metathesiophobia - Fear of changes.
Meterorophobia - Fear of Meteors.
Methyphobia - Fear of alcohol.
Microbiophobia - Fear of microbes.
Microphobia - Fear of small things.
Misophobia - Fear of being contaminated with dirt or germs.
Mnemophobia - Fear of memories.
Molysmophobia - Fear of dirt or contamination.
Molysomophobia - Fear of dirt or contamination.
Monopathophobia - Fear of difinite disease.
Monophobia - Fear of solitude or being alone.
Monophobia - Fear of menstruation.
Motorphobia - Fear of automobiles.
Mottophobia - Fear of moths..
Murophobia - Fear of mice.
Musophobia - Fear of mice.
Mycophobia - Fear or aversion to mushrooms.
Mycrophobia - Fear of small things.
Myctophobia - Fear of darkness.
Myrmecophobia - Fear of ants.
Mysophobia - Fear of germs or contamination or dirt.
Mythophobia - Fear of myths or stories or false statements.
Myxophobia - Fear of slime.


Namatophobia - Fear of names.
Nebulaphobia - Fear of fog.
Necrophobia - Fear of death or or dead things.
Nelophobia - Fear of glass.
Neopharmaphobia - Fear of new drugs..
neophobia - Fear of anything new.
Nephophobia - Fear of clouds.
Noctiphobia - Fear of the night.
Nosemaphobia - Fear of becoming ill.
Nosocomephobia - Fear of hospitals.
Nosophobia - Fear of becoming ill.
Nostophobia - Fear of returning home.
Novercaphobia - Fear of your step-mother.
Nucleomituphobia - Fear of nuclear weapons.
Nudophobia - Fear of nudity.
Numerophobia - Fear of numbers.
Nyctohlophobia - Fear of dark wooded areas, of forest at night.
Nyctophobia - Fear of the dark or of the night.


Obesophobia - Fear of gaining weight.
Ochlophobia - Fear of crowds or mobs.
Ochophobia - Fear of vehicles.
Octophobia - Fear of the figure 8.
Odontophobia - Fear of teeth or dental surgery.
Odynephobia - Fear of pain.
Odynophobia - Fear of pain.
Oenophobia - Fear of wines.
Oikophobia - Fear of home surroundings, house.
Oikophobia - Fear of houses or being in a house.
Oikophobia - Fear of home surroundings.
Olfactophobia - Fear of smells.
Ombrophobia - Fear of rain or being rained on.
Ommatophobia - Fear of eyes.
Ommetaphobia - Fear of eyes.
Oneirogmophobia - Fear of wet dreams.
Oneirophobia - Fear of dreams.
Onomatophobia - Fear of hearing a certain word or names.
Ophidiophobia - Fear of snakes.
Opthalmophobia - Fear of being stared at.
Optophobia - Fear of opening one's eyes.
Ornithophobia - Fear of birds.
Orthophobia - Fear of property.
Osmophobia - Fear of smells or odors.
Osphesiophobia - Fear of smells or odors.
Ostraconophobia - Fear of shellfish.
Ouranophobia - Fear of heaven.


Pagophobia - Fear of ice or frost.
Panophobia - Fear of everything.
Panthophobia - Fear of suffering and disease.
Pantophobia - Fear of everything.
Papaphobia - Fear fo the Pope.
Papyrophobia - Fear of paper.
Paralipophobia - Fear of neglecting duty or responsibility.
Paraphobia - Fear of sexual perversion.
Parasitophobia - Fear of parasites.
Paraskavedekatriaphobia - Fear of Friday the 13th.
Parthenophobia - Fear of virgins or young girls.
Parturiphobia - Fear of childbirth.
Pathophobia - Fear of disease.
Patroiophobia - Fear of heredity.
Peccatophobia - Fear of sinning. (imaginary crime)
Pediculophobia - Fear of lice.
Pediophobia - Fear of dolls.
Pedophobia - Fear of children.
Peladophobia - Fear of bald people.
Pellagrophobia - Fear of pellagra.
Peniaphobioa - Fear of poverty.
Pentheraphobia - Fear of mother-in-law.
Phagophobia - Fear of swallowing or eating or of being eaten.
Phalacrophobia - Fear of becoming bald.
Phallophobia - Fear of penis, esp erect.
Pharmacophobia - Fear of taking medicine.
Pharmacophobia - Fear of drugs.
Phasmophobia - Fear of ghost.
Phengophobia - Fear of daylight or sunshine.
Philemaphobia - Fear of kissing.
Philematophobia - Fear of kissing.
Philophobia - Fear of falling in love or being in love.
Philosophobia - Fear of philosophy.
Phobophobia - Fear of phobias.
Phonophobia - Fear of noises or voices or one's own voice; of telephones.
Photoaugliaphobia - Fear of glaring lights.
Photophobia - Fear of light.
Phronemophobia - Fear of thinking.
Phthiriophobia - Fear of lice.
Phthisiophobia - Fear of tuberculosis.
Placophobia - Fear of tombstones.
Plutophobia - Fear of wealth.
Pluviophobia - Fear of rain or of being rained on.
Pneumatiphobia - Fear of spirits.
Pnigerophobia - Fear of choking or of being smothered.
Pnigophobia - Fear of choking or of being smothered.
Pocrescophobia - Fear of gaining weight.
Pocresophobia - Fear of gaining weight.
Pogonophobia - Fear of beards.
Poinephobia - Fear of punishment.
Poliosophobia - Fear of contracting poliomyelitis.
Politicophobia - Fear or abnormal dislike of politicians.
Polyphobia - Fear of many things.
Ponophobia - Fear of overworking or of pain.
Porphyrophobia - Fear of the color purple.
Potamophobia - Fear of rivers or running water.
Potophobia - Fear of alcohol.
Proctophobia - Fear or rectum.
Prosophobia - Fear of progress.
Psellismophobia - Fear of stuttering.
Psychophobia - Fear of mind.
Psychrophobia - Fear of cold.
Pteromerhanophobia - Fear of flying..
Pteronophobia - Fear of being tickled by feathers.
Pupaphobia - Fear of puppets.
Pyrexiophobia - Fear of fever.
Pyrophobia - Fear of fire.


Radiophobia - Fear of radiation, x-rays.
Ranidaphobia - Fear of frogs.
Rectophobia - Fear of rectum or rectal diseases..
Rhabdophobia - Fear of being severely punished or beaten by a rod, or of being severely criticized. Also fear of magic. (wand)

Rhypophobia - Fear of defecation.
Rhytiphobia - Fear of getting wrinkles.
Rupophobia - Fear of dirt.
Russophobia - Fear of Russians.


Samhainophobia - Fear of Halloween.
Sarmassophobia - Fear of love play.
Sarmassophobia - Fear of love play.
Satanophobia - Fear of Satin.
Scabiophobia - Fear of scabies.
Scatophobia - Fear of fecal matter.
Scelerophobia - Fear of bad men, burglars.
Sciaphobia - Fear of shadows.
Sciophobia - Fear of shadows.
Scoionophobia - Fear of school.
Scoleciphobia - Fear of worms.
Scopophobia - Fear of being seen or stared at.
Scoptophobia - Fear of being seen or stared at.
Scotomaphobia - Fear of blindness in visual field.
Scotophobia - Fear of darkness.
scrïptophobia - Fear of writing in public.
Selaphobia - Fear of light flashes.
Selenophobia - Fear of the moon.
Seplophobia - Fear of decaying matter.
Sesquipedalophobia - Fear of long words.
Sexophobia - Fear of the opposit sex.
Sexophobia - Fear of the opposite sex.
Siderophobia - Fear of stars.
Sinistrophobia - Fear of things to the left, left-handed.
Sinophobia - Fear of Chinese, Chinese culture.
Sitiophobia - Fear of food.
Sitiophobia - Fear of food or eating.
Sitophobia - Fear of food or eating.
Sitophobia - Fear of food..
Snakephobia - Fear of snakes.
Soceraphobia - Fear of parents-in-law..
Social Phobia - Fear of being evaluated negatively in social situations.
Sociophobia - Fear of society or people in general.
Somniphobia - Fear of sleep.
Sophophobia - Fear of learning..
Soteriophobia - Fear of dependence on others.
Spacephobia - Fear of outer space.
Spectrophobia - Fear of specters or ghosts.
Spermatophobia - Fear of germs.
Spermophobia - Fear of germs.
Spheksophobia - Fear of wasps.
Stasibasiphobia - Fear fo standing or walking.
Stasiphobia - Fear of standing or walking.
Staurophobia - Fear of crosses or the crucifix.
Stenophobia - Fear of narrow things or places.
Stigiophobia - Fear of hell.
Stygiophobia - Fear of hell.
Suriphobia - Fear of mice.
Symbolophobia - Fear of symbolism.
Symmetrophobia - Fear of symmetry.
Syngenesophobia - Fear of relatives.
Syphilophobia - Fear of syphilis.


Tachophobia - Fear of speed.
Taeniophobia - Fear of tapeworms.
Teniophobia - Fear of tapeworms.
Taphephobia - Fear of being buried alive or of cemeteries.
Taphophobia - Fear of being buried alive or of cemeteries.
Tapinophobia - Fear of being contagious.
Taurophobia - Fear of bulls.
Technophobia - Fear of technology.
Teleophobia - Fear fo difinite plans. Fear of Religious ceremony.
Telephonophobia - Fear of telephones.
Teratophobia - Fear of bearing a deformed child or fear of monsters or deformed people.
Testaphobia - Fear of taking test.
Tetanophobia - Fear of lockjaw, tetnus.
Teutophobia - Fear of German or German things.
Textophobia - Fear of certain fabrics.
Thaasophobia - Fear of sitting.
Thalassophobia - Fear of the sea.
Thanatophobia - Fear of death or dying.
Thantophobia - Fear of death or dying.
Theatrophobia - Fear of theaters.
Theophobia - Fear of gods or religion.
Theologicophobia - Fear of theology.
Thermophobia - Fear of heat.
Tocophobia Fear of pregnancy or childbirth.
Tomophobia - Fear of surgical operations.
Tonitrophobia - Fear of thunder.
Topophobia - Fear of certain places or situations, such as stage fright.
Toxiphobia - Fear of poison or of being accidently poisoned.
Toxophobia - Fear of poison or of being accidently poisoned.
Toxicophobia - Fear of poison or of being accidently poisoned.
Traumatophobia - Fear of injury.
Tremophobia - Fear of trembling.
Trichinophobia - Fear of trichinosis.
Trichopathophobia - Fear of hair.
Trichophobia - Fear of hair.
Hypertrichophobia - Fear of hair.
Triskaidekaphobia - Fear of the number 13.
Tropophobia - Fear of moving or making changes.
Trypanophobia - Fear of injections.
Tuberculophobia - Fear of tuberculosis.
Tyrannophobia - Fear of tyrants.


Uranophobia - Fear of heaven.
Urophobia - Fear of urine or urinating.


Vaccinophobia - Fear of vaccination.
Venustraphobia - Fear of beautiful women.
Verbophobia - Fear of words.
Verminophobia - Fear of germs.
Vestiphobia - Fear of clothing.
Virginitiphobia - Fear of rape.
Vitricophobia - Fear of step-father.


Walloonphobia - Fear of Walloons.
Wiccaphobia - Fear of witches and witchcraft.


Xanthophobia - Fear of the color yellow or the word yellow.
Xenophobia - Fear of strangers or foreigners.
Xerophobia - Fear of dryness.
Xylophobia - Fear of wooden objects. Forests.


Zelophobia - Fear of jelousy.
Zeusophobia - Fear of God or gods.
Zemmiphobia - Fear of the great mole rat.
Zoophobia - Fear of animals.


Traditionally, the subject matter of economics has been studied under two broad branches: Microeconomics and Macroeconomics. In microeconomics, we study the behaviour of individual economic agents in the markets for different goods and services and try to figure out how prices and quantities of goods and services are determined through the interaction of individuals in these markets. In macroeconomics, on the other hand, we try to get an understanding of the economy as a whole by focusing our attention on aggregate measures such as total output, employment and aggregate price level. Here, we are interested in finding out how the levels of these aggregate measures are determined and how the levels of these aggregate measures change over time. Some of the important questions that are studied in microeconomics are as follows: What is the level of total output in the economy? How is the total output determined? How does the total output grow over time? Are the resources of the economy (eg labour) fully employed? What are the reasons behind the unemployment of resources? Why do prices rise? Thus, instead of studying the different markets as is done in microeconomics, in macroeconomics, we try to study the behaviour of aggregate or macro measures of the performance of the economy.


It was mentioned earlier that in principle there are more than one ways of solving the central problems of an economy. These different mechanisms in general are likely to give rise to different solutions to those problems, thereby resulting in different allocations of the resources and also different distributions of the final mix of goods and services produced in the economy. Therefore, it is important to understand which of these alternative mechanisms is more desirable for the economy as a whole. In economics, we try to analyse the different mechanisms and figure out the outcomes which are likely to result under each of these mechanisms. We also try to evaluate the mechanisms by studying how desirable the outcomes resulting from them are. Often a distinction is made between positive economic analysis and normative economic analysis depending on whether we are trying to figure out how a particular mechanism functions or we are trying to evaluate it. In positive economic analysis, we study how the different mechanisms function, and in normative economics, we try to understand whether these mechanisms are desirable or not. However, this distinction between positive and normative economic analysis is not a very sharp one. The positive and the normative issues involved in the study of the central economic problems are very closely related to each other and a proper understanding of one is not possible in isolation to the other.


Basic problems can be solved either by the free interaction of the individuals pursuing their own objectives as is done in the market or in a planned manner by some central authority like the government.
The Centrally Planned Economy

In a centrally planned economy, the government or the central authority plans all the important activities in the economy. All important decisions regarding production, exchange and consumption of goods and services are made by the government. The central authority may try to achieve a particular allocation of resources and a consequent distribution of the final combination of goods and services which is thought to be desirable for society as a whole. For example, if it is found that a good or service which is very important for the prosperity and well-being of the economy as a whole, e.g. education or health service, is not produced in adequate amount by the individuals on their own, the government might try to induce the individuals to produce adequate amount of such a good or service or, alternatively, the government may itself decide to produce the good or service in question. In a different context, if some people in the economy get so little a share of the final mix of goods and services produced in the economy that their survival is at stake, then the central authority may intervene and try to achieve an equitable distribution of the final mix of goods and services.

The Market Economy

In contrast to a centrally planned economy, in a market economy, all economic activities are organised through the market. A market, as studied in economics, is an institution6 which organises the free interaction of individuals pursuing their respective economic activities. In other words, a market is a set of arrangements where economic agents can freely exchange their endowments or products with each other. It is important to note that the term ‘market’ as used in economics is quite different from the common sense understanding of a market. In particular, it has nothing as such to do with the marketplace as you might tend to think of. For buying and selling commodities, individuals may or may not meet each other in an actual physical location. Interaction between buyer and seller can take place in a variety of situations such as a village-chowk or a super bazaar in a city, or alternatively, buyers and sellers can interact with each other through telephone or internet and conduct the exchange of commodities. The arrangements which allow people to buy and sell commodities
freely are the defining features of a market. For the smooth functioning of any system, it is imperative that there is coordination in the activities of the different constituent parts of the system. Otherwise, there can be chaos. You may wonder as to what are the forces which bring the coordination between the activities of millions of isolated individuals in a market system.

In a market system, all goods or services come with a price (which is mutually agreed upon by the buyer and the sellers) at which the exchanges take place. The price reflects, on an average, the society’s valuation of the good or service in question. If the buyers demand more of a certain good, the price of that good will rise. This will send a signal to the producer of that good to the effect that the society as a whole wants more of that good than is currently being produced and the producers of the good, in their turn, are likely to increase their production.

In this way, prices of good and services send important information to all the individuals across the market and help achieve coordination in a market system. Thus, in a market system, the central problems regarding how much and what to produce are solved through the coordination of economic activities brought
about by the price signals. In reality, all economies are mixed economies where some important decisions are taken by the government and the economic activities are by and large conducted through the market. The only difference is in terms of the extent of the role of the government in deciding the course of economic activities.

In the United States of America, the role of the government is minimal. The closest example of a centrally planned economy is the Soviet Union for the major part of the twentieth century. In India, since Independence, the government has played a major role in planning economic activities. However, the role of the government in the Indian economy has been reduced considerably in the last couple of decades.


Production, exchange and consumption of goods and services are among the basic economic activities of life. In the course of these basic economic activities, every society has to face scarcity of resources and it is the scarcity of resources that gives rise to the problem of choice. The scarce resources of an economy have competing usages. In other words, every society has to decide on how to use its scarce resources. The problems of an economy are very often summarized as follows:

What is produced and in what quantities?

Every society must decide on how much of each of the many possible goods and services it will produce. Whether to produce more of food, clothing, housing or to have more of luxury goods. Whether to have more agricultural goods or to have industrial products and services. Whether to use more resources in education and health or to use more resources in building military services. Whether to have more of basic education or more of higher education. Whether to have more of consumption goods or to have investment goods (like machine) which will boost production and consumption tomorrow.

How are these goods produced?

Every society has to decide on how much of which of the resources to use in the production of each of the different goods and services. Whether to use more labour or more machines. Which of the available technologies to adopt in the production of each of the goods?

For whom are these goods produced?

Who gets how much of the goods that are produced in the economy? How should the produce of the economy be distributed among the individuals in the economy? Who gets more and who gets less? Whether or not to ensure a minimum amount of consumption for everyone in the economy. Whether or not elementary education and basic health services should be available freely for everyone in the economy. Thus, every economy faces the problem of allocating the scarce resources to the production of different possible goods and services and of distributing the produced goods and services among the individuals within the economy. The allocation of scarce resources and the distribution of the final goods and services are the central problems of any economy.

Production Possibility Frontier

Just as individuals face scarcity of resources, the resources of an economy as a whole are always limited in comparison to what the people in the economy collectively want to have. The scarce resources have alternative usages and every society has to decide on how much of each of the resources to use in the production of different goods and services. In other words, every society has to determine how to allocate its scarce resources to different goods and services.

An allocation of the scarce resource of the economy gives rise to a particular combination of different goods and services. Given the total amount of resources, it is possible to allocate the resources in many different ways and, thereby achieving different mixes of all possible goods and services. The collection of all possible combinations of the goods and services that can be produced from a given amount of resources and a given stock of technological knowledge is called the production possibility set of the economy.


Think of any society. People in the society need many goods and services in their everyday life including food, clothing, shelter, transport facilities like roads and railways, postal services and various other services like that of teachers and doctors. In fact, the list of goods and services that any individual needs is so large that no individual in society, to begin with, has all the things she needs. Every individual has some amount of only a few of the goods and services that she would like to use. A family farm may own a plot of land, some grains, farming implements, maybe a pair of bullocks and also the labour services of the family members. A weaver may have some yarn, some cotton and other instruments required for weaving cloth. The teacher in the local school has the skills required to impart education to the students. Some others in society may not have any resource excepting their own labour services. Each of these decision making units can produce some goods or services by using the resources that it has and use part of the produce to obtain the many other goods and services which it needs.
For example, the family farm can produce corn, use part of the produce for consumption purposes and procure clothing, housing and various services in exchange for the rest of the produce. Similarly, the weaver can get the goods and services that she wants in exchange for the cloth she produces in her yarn. The teacher can earn some money by teaching students in the school and use the money for obtaining the goods and services that she wants. The labourer also can try to fulfill her needs by using whatever money she can earn by working for someone else. Each individual can thus use her resources to fulfill her needs. It goes without saying that no individual has unlimited resources compared to her needs. The amount of corn that the family farm can produce is limited by the amount of resources it has, and hence, the amount of different goods and services that it can procure in exchange of corn is also limited. As a result, the family is forced to make a choice between the different goods and services that are available. It can have more of a good or service only by giving up some amounts of other goods or services.
For example, if the family wants to have a bigger house, it may have to give up the idea of having a few more acres of arable land. If it wants more and better education for the children, it may have to give up some of the luxuries of life. The same is the case with all other individuals in society. Everyone faces scarcity of resources, and therefore, has to use the limited resources in the best possible way to fulfill her needs.

In general, every individual in society is engaged in the production of some goods or services and she wants a combination of many goods and services not all of which are produced by her. Needless to say that there has to be some compatibility between what people in society collectively want to have and what they produce. For example, the total amount of corn produced by family farm along with other farming units in a society must match the total amount of corn that people in the society collectively want to consume. If people in the society
do not want as much corn as the farming units are capable of producing collectively, a part of the resources of these units could have been used in the production of some other good or services which is in high demand. On the other hand, if people in the society want more corn compared to what the farming units are producing collectively, the resources used in the production of some other goods and services may be reallocated to the production of corn.
Similar is the case with all other goods or services. Just as the resources of an individual are scarce, the resources of the society are also scarce in comparison to what the people in the society might collectively want to have. The scarce resources of the society have to be allocated properly in the production of different goods and services in keeping with the likes and dislikes of the people of the society. Any allocation of resources of the society would result in the production of a particular combination of different goods and services. The goods and services thus produced will have to be distributed among the individuals of the society. The allocation of the limited resources and the distribution of the final mix of goods and services are two of the basic economic problems faced by the society.
In reality, any economy is much more complex compared to the society discussed above. In the light of what we have learnt about the society, let us now discuss the fundamental concerns of the discipline of economics some of which we shall study throughout this blog.

NCERT Textbooks

Adam Smith (1723 – 1790) Regarded as the father of modern Economics. Author of Wealth of Nations.

Aggregate monetary resources Broad money without time deposits of post office savings organisation (M3).

Automatic stabilisers Under certain spending and tax rules, expenditures that automatically increase or taxes that automatically decrease when economic conditions worsen, therefore, stabilizing the economy automatically.

Autonomous change A change in the values of variables in a macroeconomic model caused by a factor exogenous to the model.

Autonomous expenditure multiplier The ratio of increase (or decrease) in aggregate output or income to an increase (or decrease) in autonomous spending.

Balance of payments A set of accounts that summarise a country’s transactions with the rest of the world.

Balanced budget A budget in which taxes are equal to government spending.

Balanced budget multiplier The change in equilibrium output that results from a unit increase or decrease in both taxes and government spending.

Bank rate The rate of interest payable by commercial banks to RBI if they borrow money from the latter in case of a shortage of reserves.

Barter exchange Exchange of commodities without the mediation of money.

Base year The year whose prices are used to calculate the real GDP.

Bonds A paper bearing the promise of a stream of future monetary returns over a specified period of time. Issued by firms or governments for borrowing money from the public.

Broad money Narrow money + time deposits held by commercial banks and post office savings organisation.

Capital Factor of production which has itself been produced and which is not generally entirely consumed in the production process.

Capital gain/loss Increase or decrease in the value of wealth of a bondholder due to an appreciation or reduction in the price of her bonds in the bond market.

Capital goods Goods which are bought not for meeting immediate need of the consumer but for producing other goods.

Capitalist country or economy A country in which most of the production is carried out by capitalist firms.

Capitalist firms These are firms with the following features (a) private ownership of means of production (b) production for the market (c) sale and purchase of labour at a price which is called the wage rate (d) continuous accumulation of capital.

Cash Reserve Ratio (CRR) The fraction of their deposits which the commercial banks are required to keep with RBI.

Circular flow of income The concept that the aggregate value of goods and services produced in an economy is going around in a circular way. Either as factor payments, or as expenditures on goods and services, or as the value of aggregate

Consumer durables Consumption goods which do not get exhausted immediately but last over a period of time are consumer durables.

Consumer Price Index (CPI) Percentage change in the weighted average price level. We take the prices of a given basket of consumption goods.

Consumption goods Goods which are consumed by the ultimate consumers or meet the immediate need of the consumer are called consumption goods. It may include services as well.

Corporate tax Taxes imposed on the income made by the corporations (or private sector firms).

Currency deposit ratio The ratio of money held by the public in currency to that held as deposits in commercial banks.

Deficit financing through central bank borrowing Financing of budget deficit by the government through borrowing money from the central bank. Leads to increase in money supply in an economy and may result in inflation.

Depreciation A decrease in the price of the domestic currency in terms of the foreign currency under floating exchange rates. It corresponds to an increase in the exchange rate.

Depreciation Wear and tear or depletion which capital stock undergoes over a period of time.

Devaluation The decrease in the price of domestic currency under pegged exchange rates through official action.

Double coincidence of wants A situation where two economic agents have complementary demand for each others’ surplus production.

Economic agents or units Economic units or economic agents are those individuals or institutions which take economic decisions.

Effective demand principle If the supply of final goods is assumed to be infinitely elastic at constant price over a short period of time, aggregate output is determined solely by the value of aggregate demand. This is called effective demand principle.

Entrepreneurship The task of organising, coordinating and risk-taking during production.

Ex ante consumption The value of planned consumption.

Ex ante investment The value of planned investment.

Ex ante The planned value of a variable as opposed to its actual value.

Ex post The actual or realised value of a variable as opposed to its planned value.

Expenditure method of calculating national income Method of calculating the national income by measuring the aggregate value of final expenditure for the goods and services produced in an economy over a period of time.

Exports Sale of goods and services by the domestic country to the rest of the world.

External sector It refers to the economic transaction of the domestic country with the rest of the world.

Externalities Those benefits or harms accruing to another person, firm or any other entity which occur because some person, firm or any other entity may be involved in an economic activity. If someone is causing benefits or good externality to another, the latter does not pay the former. If someone is inflicting harm or bad externality to another, the former does not compensate the latter.

Fiat money Money with no intrinsic value.

Final goods Those goods which do not undergo any further transformation in the production process.

Firms Economic units which carry out production of goods and services and employ factors of production.

Fiscal policy The policy of the government regarding the level of government spending and transfers and the tax structure.

Fixed exchange rate An exchange rate between the currencies of two or more countries that is fixed at some level and adjusted only infrequently.

Flexible/floating exchange rate An exchange rate determined by the forces of demand and supply in the foreign exchange market without central bank intervention.

Flows Variables which are defined over a period of time.

Foreign exchange Foreign currency, all currencies other than the domestic currency of a given country.

Foreign exchange reserves Foreign assets held by the central bank of the country.

Four factors of production Land, Labour, Capital and Entrepreneurship. Together these help in the production of goods and services.

GDP Deflator Ratio of nominal to real GDP.

Government expenditure multiplier The numerical coefficient showing the size of the increase in output resulting from each unit increase in government spending.

Government The state, which maintains law and order in the country, imposes taxes and fines, makes laws and promotes the economic wellbeing of the citizens.

Great Depression The time period of 1930s (started with the stock market crash in New York in 1929) which saw the output in the developed countries fall and unemployment rise by huge amounts.

Gross Domestic Product (GDP) Aggregate value of goods and services produced within the domestic territory of a country. It includes the replacement investment of the depreciation of capital stock.

Gross fiscal deficit The excess of total government expenditure over revenue receipts and capital receipts that do not create debt.

Gross investment Addition to capital stock which also includes replacement for the wear and tear which the capital stock undergoes.

Gross National Product (GNP) GDP + Net Factor Income from Abroad. In other words GNP includes the aggregate income made by all citizens of the country, whereas GDP includes incomes by foreigners within the domestic economy and excludes incomes earned by the citizens in a foreign economy.

Gross primary deficit The fiscal deficit minus interest payments.

High powered money Money injected by the monetary authority in the economy. Consists mainly of currency.

Households The families or individuals who supply factors of production to the firms and which buy the goods and services from the firms.

Imports Purchase of goods and services by the domestic country to the rest of the world.

Income method of calculating national income Method of calculating national income by measuring the aggregate value of final factor payments made (= income) in an economy over a period of time.

Interest Payment for services which are provided by capital.

Intermediate goods Goods which are used up during the process of production of other goods.

Inventories The unsold goods, unused raw materials or semi-finished goods which a firm carries from a year to the next.

John Maynard Keynes (1883 – 1946) Arguably the founder of Macroeconomics as a separate discipline.

Labour Human physical effort used in production.

Land Natural resources used in production – either fixed or consumed.

Legal tender Money issued by the monetary authority or the government which cannot be refused by anyone.

Lender of last resort The function of the monetary authority of a country in which it provides guarantee of solvency to commercial banks in a situation of liquidity crisis or bank runs.

Liquidity trap A situation of very low rate of interest in the economy where every economic agent expects the interest rate to rise in future and consequently bond prices to fall, causing capital loss. Everybody holds her wealth in money and
speculative demand for money is infinite.

Macroeconomic model Presenting the simplified version of the functioning of a macroeconomy through either analytical reasoning or mathematical, graphical representation.

Managed floating A system in which the central bank allows the exchange rate to be determined by market forces but intervene at times to influence the rate.

Marginal propensity to consume The ratio of additional consumption to additional income.

Medium of exchange The principal function of money for facilitating commodity exchanges.

Money multiplier The ratio of total money supply to the stock of high powered money in an economy.

Narrow money Currency notes, coins and demand deposits held by the public in commercial banks.

National disposable income Net National Product at market prices + Other Current Transfers from the rest of the World.

Net Domestic Product (NDP) Aggregate value of goods and services produced within the domestic territory of a country which does not include the depreciation of capital stock.

Net interest payments made by households Interest payment made by the households to the firms – interest payments received by the households.

Net investment Addition to capital stock; unlike gross investment, it does not include the replacement for the depletion of capital stock.

Net National Product (NNP) (at market price) GNP – depreciation.

NNP (at factor cost) or National Income (NI) NNP at market price – (Indirect taxes – Subsidies).

Nominal exchange rate The number of units of domestic currency one must give up to get an unit of foreign currency; the price of foreign currency in terms of domestic currency.

Nominal (GDP) GDP evaluated at current market prices.

Non-tax payments Payments made by households to the firms or the government as non-tax obligations such as fines.

Open market operation Purchase or sales of government securities by the central bank from the general public in the bond market in a bid to increase or decrease the money supply in the economy.

Paradox of thrift As people become more thrifty they end up saving less or same as before in aggregate.

Parametric shift Shift of a graph due to a change in the value of a parameter.

Personal Disposable Income (PDI) PI – Personal tax payments – Non-tax payments.

Personal Income (PI) NI – Undistributed profits – Net interest payments made by households – Corporate tax + Transfer payments to the households from the government and firms.

Personal tax payments Taxes which are imposed on individuals, such as income tax.

Planned change in inventories Change in the stock of inventories which has occurred in a planned way.

Present value (of a bond) That amount of money which, if kept today in an interest earning project, would generate the same income as the sum promised by a bond over its lifetime.

Private income Factor income from net domestic product accruing to the private sector + National debt interest + Net factor income from abroad + Current transfers from government + Other net transfers from the rest of the world.

Product method of calculating national income Method of calculating the national income by measuring the aggregate value of production taking place in an economy over a period of time.

Profit Payment for the services which are provided by entrepreneurship.

Public good Goods or services that are collectively consumed; it is not possible to exclude anyone from enjoying their benefits and one person’s consumption does not reduce that available to others.

Purchasing power parity A theory of international exchange which holds that the price of similar goods in different countries is the same.

Real exchange rate The relative price of foreign goods in terms of domestic goods.

Real GDP GDP evaluated at a set of constant prices.

Rent Payment for services which are provided by land (natural resources).

Reserve deposit ratio The fraction of their total deposits which commercial banks keep as reserves.

Revaluation A decrease in the exchange rate in a pegged exchange rate system which makes the foreign currency cheaper in terms of the domestic currency.

Revenue deficit The excess of revenue expenditure over revenue receipts.

Ricardian equivalence The theory that consumers are forward looking and anticipate that government borrowing today will mean a tax increase in the future to repay the debt, and will adjust consumption accordingly so that it will have the
same effect on the economy as a tax increase today.

Speculative demand Demand for money as a store of wealth.

Statutory Liquidity Ratio (SLR) The fraction of their total demand and time deposits which the commercial banks are required by RBI to invest in specified liquid assets.

Sterilisation Intervention by the monetary authority of a country in the money market to keep the money supply stable against exogenous or sometimes external shocks such as an increase in foreign exchange inflow.

Stocks Those variables which are defined at a point of time.

Store of value Wealth can be stored in the form of money for future use. This function of money is referred to as store of value.

Transaction demand Demand for money for carrying out transactions.

Transfer payments to households from the government and firms Transfer payments are payments which are made without any counterpart of services received by the payer. For examples, gifts, scholarships, pensions.

Undistributed profits That part of profits earned by the private and government owned firms which are not distributed among the factors of production.

Unemployment rate This may be defined as the number of people who were unable to find a job (though they were looking for jobs), as a ratio of total number of people who were looking for jobs.

Unit of account The role of money as a yardstick for measuring and comparing values of different commodities.

Unplanned change in inventories Change in the stock of inventories which has occurred in an unexpected way.

Value added Net contribution made by a firm in the process of production. It is defined as, Value of production – Value of intermediate goods used.

Wage Payment for the services which are rendered by labour.

Wholesale Price Index (WPI) Percentage change in the weighted average price level. We take the prices of a given basket of goods which is traded in bulk.

With consumers and firms having an option to buy goods produced at home and abroad, we now need to distinguish between domestic demand for goods and the demand for domestic goods.

National Income Identity for an Open Economy

In a closed economy, there are three sources of demand for domestic goods – Consumption (C ), government spending (G), and domestic investment (I ). We can write

Y = C + I + G (6.2)

In an open economy, exports (X) constitute an additional source of demand for domestic goods and services that comes from abroad and therefore must be added to aggregate demand. Imports (M) supplement supplies in domestic markets and constitute that part of domestic demand that falls on foreign goods and services. Therefore, the national income identity for an open economy is

Y + M = C + I + G + X (6.3)

Rearranging, we get

Y = C + I + G + X – M (6.4)

Y = C + I + G + NX (6.5)

where, NX is net exports (exports – imports). A positive NX (with exports greater than imports) implies a trade surplus and a negative NX (with imports exceeding exports) implies a trade deficit. To examine the roles of imports and exports in determining equilibrium income in an open economy, we follow the same procedure as we did for the closed economy case – we take investment and government spending as autonomous. In addition, we need to specify the determinants of imports and exports. The demand for imports depends on domestic income (Y) and the real exchange rate (R ). Higher income leads to higher imports. Recall that the real exchange rate is defined as the relative price of foreign goods in terms of domestic goods. A higher R makes foreign goods relatively more expensive, thereby leading to a decrease in the quantity of imports. Thus, imports depend positively on Y and negatively on R. The export of one country is, by definition, the import of another. Thus, our exports would constitute foreign imports. It would depend on foreign income, Yf , and on R. A rise in Yf will increase foreign demand for our goods, thus leading to higher exports. An increase in R, which makes domestic goods cheaper, will increase our exports. Exports depend positively on foreign income and the real exchange rate. Thus, exports and imports depend on domestic income, foreign income and the real exchange rate. We assume price levels and the nominal exchange rate to be constant, hence R will be fixed. From the point of view of our country, foreign income, and therefore exports, are considered exogenous (X = X ). The demand for imports is thus assumed to depend on income and have an autonomous component
M = M + mY, where M > 0 is the autonomous component, 0 < y =" C" y =" A" y =" A">
Equilibrium Output and the Trade Balance

We shall provide a diagrammatic explanation of the above mechanisms and, in addition, their impact on the trade balance. Net exports, (NX = X – M), as we saw earlier, depend on Y, Yf and R. A rise in Y raises import spending and leads to trade deficit (if initially we had trade balance, NX = 0). A rise in Yf , other things being equal, raises our exports, creates a trade surplus and raises aggregate income. A real depreciation would raise exports and reduce imports, thus increasing our net exports.

Change in Prices:
Next we consider the effects of changes in prices, assuming the exchange rate to be fixed. If prices of domestic products fall, while say foreign prices remain constant, domestic exports will rise, adding to aggregate demand, and hence will raise our output and income. Analogously, a rise in prices of a country’s exports will decrease that country’s net exports and output and income. Similarly, a price increase abroad will make foreign products more expensive and hence again raise net exports and domestic output and income. Price decreases abroad have the opposite effects.

Exchange Rate Changes:
Changes in nominal exchange rates would change the real exchange rate and hence international relative prices. A depreciation of the rupee will raise the cost of buying foreign goods and make domestic goods less costly. This will raise net exports and therefore increase aggregate demand. Conversely, a currency appreciation would reduce net exports and, therefore, decrease aggregate demand. However, we must note that international trade patterns take time to respond to changes in exchange rates. A considerable period of time may elapse before any improvement in net exports is apparent.


Having considered accounting of international transactions on the whole, we will now take up a single transaction. Let us assume that an Indian resident wants to visit London on a vacation (an import of tourist services). She will have to pay in pounds for her stay there. She will need to know where to obtain the pounds and at what price. Her demand for pounds would constitute a demand for foreign exchange which would be supplied in the foreign exchange market – the market in which national currencies are traded for one another. The major participants in this market are commercial banks, foreign exchange brokers and other authorised dealers and the monetary authorities. It is important to note that, although the participants themselves may have their own trading centres, the market itself is world-wide. There is close and continuous contact between the trading centres and the participants deal in more than one market. The price of one currency in terms of the other is known as the exchange rate. Since there is a symmetry between the two currencies, the exchange rate may be defined in one of the two ways. First, as the amount of domestic currency required to buy one unit of foreign currency, i.e. a rupee-dollar exchange rate of Rs 50 means that it costs Rs 50 to buy one dollar, and second, as the cost in foreign currency of purchasing one unit of domestic currency. In the above case, we would say that it costs 2 cents to buy a rupee. The practice in economic literature, however, is to use the former definition – as the price of foreign currency in terms of domestic currency. This is the bilateral nominal exchange rate – bilateral in the sense that they are exchange rates for one currency against another and they are nominal because they quote the exchange rate in money terms, i.e. so many rupees per dollar or per pound. However, returning to our example, if one wants to plan a trip to London, she needs to know how expensive British goods are relative to goods at home. The measure that captures this is the real exchange rate – the ratio of foreign to domestic prices, measured in the same currency. It is defined as

Real exchange rate = f eP P (6.1)

where P and Pf are the price levels here and abroad, respectively, and e is the rupee price of foreign exchange (the nominal exchange rate). The numerator expresses prices abroad measured in rupees, the denominator gives the domestic price level measured in rupees, so the real exchange rate measures prices abroad relative to those at home. If the real exchange rate is equal to one, currencies are at purchasing power parity. This means that goods cost the same in two countries when measured in the same currency. For instance, if a pen costs $4 in the US and the nominal exchange rate is Rs 50 per US dollar, then with a real exchange rate of 1, it should cost Rs 200 (ePf = 50 × 4) in India. If the real exchange rises above one, this means that goods abroad have become more expensive than goods at home. The real exchange rate is often taken as a measure of a country’s international competitiveness. Since a country interacts with many countries, we may want to see the movement of the domestic currency relative to all other currencies in a single number rather than by looking at bilateral rates. That is, we would want an index for the exchange rate against other currencies, just as we use a price index to show how the prices of goods in general have changed. This is calculated as the Nominal Effective Exchange Rate (NEER) which is a multilateral rate representing the price of a representative basket of foreign currencies, each weighted by its importance to the domestic country in international trade (the average of export and import shares is taken as an indicator of this). The Real Effective Exchange Rate (REER) is calculated as the weighted average of the real exchange rates of all its trade partners, the weights being the shares of the respective countries in its foreign trade. It is interpreted as the quantity of domestic goods required to purchase one unit of a given basket of foreign goods.

Determination of the Exchange Rate

The question arises as to why the foreign exchange rate1 is at this level and what causes its movements? To understand the economic principles that lie behind exchange rate determination, we study the major exchange rate regimes2 that have characterised the international monetary system. There has been a move from a regime of commitment of fixed-price convertibility to one without commitments where residents enjoy greater freedom to convert domestic currency into foreign currencies but do not enjoy a price guarantee.

Flexible Exchange Rates

In a system of flexible exchange rates (also known as floating exchange rates), the exchange rate is determined by the forces of market demand and supply. In a completely flexible system, the central banks follow a simple set of rules – they do nothing to directly affect the level of the exchange rate, in other words they do not intervene in the foreign exchange market (and therefore, there are no official reserve transactions). The link between the balance of payments accounts and the transactions in the foreign exchange market is evident when we recognise that all expenditures by domestic residents on foreign goods, services and assets and all foreign transfer payments (debits in the BoP accounts) also represent demand for foreign exchange. The Indian resident buying a Japanese car pays for it in rupees but the Japanese exporter will expect to be paid in yen. So rupees must be exchanged for yen in the foreign exchange market. Conversely, all exports by domestic residents reflect equal earnings of foreign exchange. For instance, Indian exporters will expect to be paid in rupees and, to buy our goods, foreigners must sell their currency and buy rupees. Total credits in the BoP accounts are then equal to the supply of foreign exchange. Another reason for the demand for foreign exchange is for speculative purposes.

Let us assume, for simplicity, that India and the United States are the only countries in the world, so that there is only one exchange rate to be determined. The demand curve (DD) is downward sloping because a rise in the price of foreign exchange will increase the cost in terms of rupees of purchasing foreign goods. Imports will therefore decline and less foreign exchange will be demanded. For the supply of foreign exchange to increase as the exchange rate rises, the foreign demand for our exports must be more than unit elastic, meaning simply that a one per cent increase in the exchange rate (which results in a one per cent decline in the price of the export good to the foreign country buying our good) must result in an increase in demand of more than one per cent. If this condition is met, the rupee volume of our exports will rise more than proportionately to the rise in the exchange rate, and earnings in dollars (the supply of foreign exchange) will increase as the exchange rate rises.

However, a vertical supply curve (with a unit elastic foreign demand for Indian exports) would not change the analysis. We note that here we are holding all prices other than the exchange rate constant. In this case of flexible exchange rates without central bank intervention, the exchange rate moves to clear the market, to equate the demand for and supply of foreign exchange. If the demand for foreign exchange goes up due to Indians travelling abroad more often, or increasingly showing a preference for imported goods, the DD curve will shift upward and rightward. The resulting intersection would be at a higher exchange rate. Changes in the price of foreign exchange under flexible exchange rates are referred to as currency depreciation or appreciation. In the above case, the domestic currency (rupee) has depreciated since it has become less expensive in terms of foreign currency. For instance, if the equilibrium rupeedollar exchange rate was Rs 45 and now it has become Rs 50 per dollar, the rupee has depreciated against the dollar. By contrast, the currency appreciates when it becomes more expensive in terms of foreign currency. At the initial equilibrium exchange rate e*, there is now an excess demand for foreign exchange. The rise in exchange rate (depreciation) will cause the quantity of import demand to fall since the rupee price of imported goods rises with the exchange rate. Also, the quantity of exports demanded will increase since the rise in the exchange rate makes exports less expensive to foreigners. At the new equilibrium with e1, the supply and demand for foreign exchange is again equal.

Exchange rates in the market depend not only on the demand and supply of exports and imports, and investment in assets, but also on foreign exchange speculation where foreign exchange is demanded for the possible gains from appreciation of the currency. Money in any country is an asset. If Indians believe that the British pound is going to increase in value relative to the rupee, they will want to hold pounds. For instance, if the current exchange rate is Rs 80 to a pound and investors believe that the pound is going to appreciate by the end of the month and will be worth Rs 85, investors think if they took Rs 80,000 and bought 1,000 pounds, at the end of the month, they would be able to exchange the pounds for Rs 85,000, thus making a profit of Rs 5,000. This expectation would increase the demand for pounds and cause the rupee-pound exchange rate to increase in the present, making the beliefs self-fulfilling. The above analysis assumes that interest rates, incomes and prices remain constant. However, these may change and that will shift the demand and supply curves for foreign exchange.

Interest Rates and the Exchange Rate:
In the short run, another factor that is important in determining exchange rate movements is the interest rate differential i.e. the difference between interest rates between countries. There are huge funds owned by banks, multinational corporations and wealthy individuals which move around the world in search of the highest interest rates. If we assume that government bonds in country A pay 8 per cent rate of interest whereas equally safe bonds in country B yield 10 per cent, the interest rate diferential is 2 per cent. Investors from country A will be attracted by the high interest rates in country B and will buy the currency of country B selling their own currency. At the same time investors in country B will also find investing in their own country more attractive and will therefore demand less of country A’s currency. This means that the demand curve for country A’s currency will shift to the left and the supply curve will shift to the right causing a depreciation of country A’s currency and an appreciation of country B’s currency. Thus, a rise in the interest rates at home often leads to an appreciation of the domestic currency. Here, the implicit assumption is that no restrictions exist in buying bonds issued by foreign governments.

Income and the Exchange Rate:
When income increases, consumer spending increases. Spending on imported goods is also likely to increase. When imports increase, the demand curve for foreign exchange shifts to the right. There is a depreciation of the domestic currency. If there is an increase in income abroad as well, domestic exports will rise and the supply curve of foreign exchange shifts outward. On balance, the domestic currency may or may not depreciate. What happens will depend on whether exports are growing faster than imports. In general, other things remaining equal, a country whose aggregate demand grows faster than the rest of the world’s normally finds its currency depreciating because its imports grow faster than its exports. Its demand curve for foreign currency shifts faster than its supply curve.

Exchange Rates in the Long Run:
The Purchasing Power Parity (PPP) theory is used to make long-run predictions about exchange rates in a flexible exchange rate system. According to the theory, as long as there are no barriers to trade like tariffs (taxes on trade) and quotas (quantitative limits on imports), exchange rates should eventually adjust so that the same product costs the same whether measured in rupees in India, or dollars in the US, yen in Japan and so on, except for differences in transportation. Over the long run, therefore, exchange rates between any two national currencies adjust to reflect differences in the price levels in the two countries.

If a shirt costs $8 in the US and Rs 400 in India, the rupee-dollar exchange rate should be Rs 50. To see why, at any rate higher than Rs 50, say Rs 60, it costs Rs 480 per shirt in the US but only Rs 400 in India. In that case, all foreign customers would buy shirts from India. Similarly, any exchange rate below Rs 50 per dollar will send all the shirt business to the US. Next, we suppose that prices in India rise by 20 per cent while prices in the US rise by 50 per cent. Indian shirts would now cost Rs 480 per shirt while American shirts cost $12 per shirt. For these two prices to be equivalent, $12 must be worth Rs 480, or one dollar must be worth Rs 40. The dollar, therefore, has depreciated. According to the PPP theory, differences in the domestic inflation and foreign inflation are a major cause of adjustment in exchange rates. If one country has higher inflation than another, its exchange rate should be depreciating.

However, we note that if American prices rise faster than Indian prices and, at the same time, countries erect tariff barriers to keep Indian shirts out (but not American ones), the dollar may not depreciate. Also, there are many goods that are not tradeable and inflation rates for them will not matter. Further, few goods that different countries produce and trade are uniform or identical. Most economists contend that other factors are more important than relative prices for exchange rate determination in the short run. However, in the long run, purchasing power parity plays an important role.
Fixed Exchange Rates

Countries have had flexible exchange rate system ever since the breakdown of the Bretton Woods system in the early 1970s. Prior to that, most countries had fixed or what is called pegged exchange rate system, in which the exchange rate is pegged at a particular level. Sometimes, a distinction is made between the fixed and pegged exchange rates. It is argued that while the former is fixed, the latter is maintained by the monetary authorities, in that the value at which the exchange rate is pegged (the par value) is a policy variable – it may be changed. There is a common element between the two systems. Under a fixed exchange rate system, such as the gold standard, adjustment to BoP surpluses or deficits cannot be brought about through changes in the exchange rate. Adjustment must either come about ‘automatically’ through the workings of the economic system (through the mechanism explained by Hume, given below) or be brought about by the government. A pegged exchange rate system may, as long as the exchange rate is not changed, and is not expected to change, display the same characteristics. However, there is another option open to the government – it may change the exchange rate. A devaluation is said to occur when the exchange rate is increased by social action under a pegged exchange rate system. The opposite of devaluation is a revaluation. Or, the government may choose to leave the exchange rate unchanged and deal with the BoP problem by the use of monetary and fiscal policy. Most governments change the exchange rate very infrequently. In our analysis, we use the terms fixed and pegged exchange rates interchangeably to denote an exchange rate regime where the exchange rate is set by government decisions and maintained by government actions. We examine the way in which a country can ‘peg’ or fix the level of its exchange rate. We assume that Reserve bank of India (RBI) wishes to fix an exact par value for the rupee at Rs 45 per dollar (e1 in Fig. 6.3). Assuming that this official exchange rate is below the equilibrium exchange rate (here e* = Rs 50) of the flexible exchange rate system, the rupee will be overvalued and the dollar undervalued. This means that if the exchange rate were market determined, the price of dollars in terms of rupees would have to rise to clear the market. At Rs 45 to a dollar, the rupee is more expensive than it would be at Rs 50 to a dollar (thinking of the rate in dollar-rupee terms, now each rupee costs 2.22 cents instead of 2 cents). At this rate, the demand for dollars is higher than the supply of dollars. Since the demand and supply schedules were constructed from the BoP accounts (measuring only autonomous transactions), this excess demand implies a deficit in the BoP. The deficit is bridged by central bank intervention. In this case, the RBI would sell dollars for rupees in the foreign exchange market to meet this excess demand AB, thus neutralising the upward pressure on the exchange rate. The RBI stands ready to buy and sell dollars at that rate to prevent the exchange rate from rising (since no one would buy at more) or falling (since no one would sell for less).

Now the RBI might decide to fix the exchange rate at a higher level – Rs 47 per dollar – to bridge part of the deficit in BoP. This devaluation of the domestic currency would make imports expensive and our exports cheaper, leading to a narrowing of the trade deficit. It is important to note that repeated central bank intervention to finance deficits and keep the exchange rate fixed will eventually exhaust the official reserves. This is the main flaw in the system of fixed exchange rates. Once speculators believe that the exchange rate cannot be held for long they would buy foreign exchange (say, dollars) in massive amounts. The demand for dollars will rise sharply causing a BoP deficit. Without sufficient reserves, the central bank will have to allow the exchange rate to reach its equilibrium level. This might amount to an even larger devaluation than would have been required before the speculative ‘attack’ on the domestic currency began. International experience shows that it is precisely this that has led many countries to abandon the system of fixed exchange rates. Fear of such an attack induced the US to let its currency float in 1971, one of the major events which precipitated the breakdown of the Bretton Woods system.

Managed Floating

Without any formal international agreement, the world has moved on to what can be best described as a managed floating exchange rate system. It is a mixture of a flexible exchange rate system (the float part) and a fixed rate system (the managed part). Under this system, also called dirty floating, central banks intervene to buy and sell foreign currencies in an attempt to moderate exchange rate movements whenever they feel that such actions are appropriate. Official reserve transactions are, therefore, not equal to zero.

Exchange Rate Management: The International Experience

The Gold Standard:
From around 1870 to the outbreak of the First World War in 1914, the prevailing system was the gold standard which was the epitome of the fixed exchange rate system. All currencies were defined in terms of gold; indeed some were actually made of gold. Each participant country committed to guarantee the free convertibility of its currency into gold at a fixed price. This meant that residents had, at their disposal, a domestic currency which was freely convertible at a fixed price into another asset (gold) acceptable in international payments. This also made it possible for each currency to be convertible into all others at a fixed price. Exchange rates were determined by its worth in terms of gold (where the currency was made of gold, its actual gold content). For example, if one unit of say currency A was worth one gram of gold, one unit of currency B was worth two grams of gold, currency B would be worth twice as much as currency A. Economic agents could directly convert one unit of currency B into two units of currency A, without having to first buy gold and then sell it. The rates would fluctuate between an upper and a lower limit, these limits being set by the costs of melting, shipping and recoining between the two Currencies 3. To maintain the official parity each country needed an adequate stock of gold reserves. All countries on the gold standard had stable exchange rates.

The question arose – would not a country lose all its stock of gold if it imported too much (and had a BoP deficit)? The mercantilist4 explanation was that unless the state intervened, through tariffs or quotas or subsidies, on exports, a country would lose its gold and that was considered one of the worst tragedies. David Hume, a noted philosopher writing in 1752, refuted this view and pointed out that if the stock of gold went down, all prices and costs would fall commensurately and no one in the country would be worse off. Also, with cheaper goods at home, imports would fall and exports rise (it is the real exchange rate which will determine competitiveness). The country from which we were importing and making payments in gold would face an increase in prices and costs, so their now expensive exports would fall and their imports of the first country’s now cheap goods would go up. The result of this pricespecie- flow (precious metals were referred to as ‘specie’ in the eighteenth century) mechanism is normally to improve the BoP of the country losing gold, and worsen that of the country with the favourable trade balance, until equilibrium in international trade is re-established at relative prices that keep imports and exports in balance with no further net gold flow. The equilibrium is stable and self-correcting, requiring no tariffs and state action. Thus, fixed exchange rates were maintained by an automatic equilibrating mechanism. Several crises caused the gold standard to break down periodically.

Moreover, world price levels were at the mercy of gold discoveries. This can be explained by looking at the crude Quantity Theory of Money, M = kPY, according to which, if output (GNP) increased at the rate of 4 per cent per year, the gold supply would have to increase by 4 per cent per year to keep prices stable. With mines not producing this much gold, price levels were falling all over the world in the late nineteenth century, giving rise to social unrest. For a period, silver supplemented gold introducing ‘bimetallism’. Also, fractional reserve banking helped to economise on gold. Paper currency was not entirely backed by gold; typically countries held one-fourth gold against its paper currency. Another way of economising on gold was the gold exchange standard which was adopted by many countries which kept their money exchangeable at fixed prices with respect to gold but held little or no gold. Instead of gold, they held the currency of some large country (the United States or the United Kingdom) which was on the gold standard. All these and the discovery of gold in Klondike and South Africa helped keep deflation at bay till 1929. Some economic historians attribute the Great Depression to this shortage of liquidity. During 1914-45, there was no maintained universal system but this period saw both a brief return to the gold standard and a period of flexible exchange rates.

The Bretton Woods System:
The Bretton Woods Conference held in 1944 set up the International Monetary Fund (IMF) and the World Bank and reestablished a system of fixed exchange rates. This was different from the international gold standard in the choice of the asset in which national currencies would be convertible. A two-tier system of convertibility was established at the centre of which was the dollar. The US monetary authorities guaranteed the convertibility of the dollar into gold at the fixed price of $35 per ounce of gold. The second-tier of the system was the commitment of monetary authority of each IMF member participating in the system to convert their currency into dollars at a fixed price. The latter was called the official exchange rate. For instance, if French francs could be exchanged for dollars at roughly 5 francs per dollar, the dollars could then be exchanged for gold at $35 per ounce, which fixed the value of the franc at 175 francs per ounce of gold (5 francs per dollar times 35 dollars per ounce).
A change in exchange rates was to be permitted only in case of a ‘fundamental disequilibrium’ in a nation’s BoP – which came to mean a chronic deficit in the BoP of sizeable proportions. Such an elaborate system of convertibility was necessary because the distribution of gold reserves across countries was uneven with the US having almost 70 per cent of the official world gold reserves. Thus, a credible gold convertibility of the other currencies would have required a massive redistribution of the gold stock. Further, it was believed that the existing gold stock would be insufficient to sustain the growing demand for international liquidity. One way to save on gold, then, was a two-tier convertible system, where the key currency would be convertible into gold and the other currencies into the key currency.

In the post-World War II scenario, countries devastated by the war needed enormous resources for reconstruction. Imports went up and their deficits were financed by drawing down their reserves. At that time, the US dollar was the main component in the currency reserves of the rest of the world, and those reserves had been expanding as a consequence of the US running a continued balance of payments deficit (other countries were willing to hold those dollars as a reserve asset because they were committed to maintain convertibility between their currency and the dollar).

The problem was that if the short-run dollar liabilities of the US continued to increase in relation to its holdings of gold, then the belief in the credibility of the US commitment to convert dollars into gold at the fixed price would be eroded. The central banks would thus have an overwhelming incentive to convert the existing dollar holdings into gold, and that would, in turn, force the US to give up its commitment. This was the Triffin Dilemma after Robert Triffin, the main critic of the Bretton Woods system. Triffin suggested that the IMF should be turned into a ‘deposit bank’ for central banks and a new ‘reserve asset’ be created under the control of the IMF. In 1967, gold was displaced by creating the Special Drawing Rights (SDRs), also known as ‘paper gold’, in the IMF with the intention of increasing the stock of international reserves.

Originally defined in terms of gold, with 35 SDRs being equal to one ounce of gold (the dollar-gold rate of the Bretton Woods system), it has been redefined several times since 1974. At present, it is calculated daily as the weighted sum of the values in dollars of four currencies (euro, dollar, Japanese yen, pound sterling) of the five countries (France, Germany, Japan, the UK and the US). It derives its strength from IMF members being willing to use it as a reserve currency and use it as a means of payment between central banks to exchange for national currencies. The original installments of SDRs were distributed to member countries according to their quota in the Fund (the quota was broadly related to the country’s economic importance as indicated by the value of its international trade). The breakdown of the Bretton Woods system was preceded by many events, such as the devaluation of the pound in 1967, flight from dollars to gold in 1968 leading to the creation of a two-tiered gold market (with the official rate at $35 per ounce and the private rate market determined), and finally in August 1971, the British demand that US guarantee the gold value of its dollar holdings. This led to the US decision to give up the link between the dollar and gold.

The ‘Smithsonian Agreement’ in 1971, which widened the permissible band of movements of the exchange rates to 2.5 per cent above or below the new ‘central rates’ with the hope of reducing pressure on deficit countries, lasted only 14 months. The developed market economies, led by the United Kingdom and soon followed by Switzerland and then Japan, began to adopt floating exchange rates in the early 1970s. In 1976, revision of IMF Articles allowed countries to choose whether to float their currencies or to peg them (to a single currency, a basket of currencies, or to the SDR). There are no rules governing pegged rates and no de facto supervision of floating exchange rates.

The Current Scenario:
Many countries currently have fixed exchange rates. Some countries peg their currency to the dollar. The creation of the European Monetary Union in January, 1999, involved permanently fixing the exchange rates between the currencies of the members of the Union and the introduction of a new common currency, the Euro, under the management of the European Central Bank. From January, 2002, actual notes and coins were introduced. So far, 12 of the 25 members of the European Union have adopted the euro. Some countries pegged their currency to the French franc; most of these are former French colonies in Africa. Others peg to a basket of currencies, with the weights reflecting the composition of their trade. Often smaller countries also decide to fix their exchange rates relative to an important trading partner. Argentina, for example, adopted the currency board system in 1991. Under this, the exchange rate between the local currency (the peso) and the dollar was fixed by law. The central bank held enough foreign currency to back all the domestic currency and reserves it had issued. In such an arrangement, the country cannot expand the money supply at will. Also, if there is a domestic banking crisis (when banks need to borrow domestic currency) the central bank can no longer act as a lender of last resort. However, following a crisis, Argentina abandoned the currency board and let its currency float in January 2002.

Another arrangement adopted by Equador in 2000 was dollarisation when it abandoned the domestic currency and adopted the US dollar. All prices are quoted in dollar terms and the local currency is no longer used in transactions. Although uncertainty and risk can be avoided, Equador has given the control over its money supply to the Central Bank of the US – the Federal Reserve – which will now be based on economic conditions in the US. On the whole, the international system is now characterised by a multiple of regimes. Most exchange rates change slightly on a day-to-day basis, and market forces generally determine the basic trends. Even those advocating greater fixity in exchange rates generally propose certain ranges within which governments should keep rates, rather than literally fix them. Also, there has been a virtual elimination of the role for gold. Instead, there is a free market in gold in which the price of gold is determined by its demand and supply coming mainly from jewellers, industrial users, dentists, speculators and ordinary citizens who view gold as a good store of value.

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