Numeraire And Dollarization Essay ⋆ Political Science Essay Examples ⋆ EssayEmpire

Numeraire and dollarization are both terms that refer to a country’s adoption of a foreign currency as a numeraire and/or legal tender instead of a national currency. Numeraire is a unit of account, against which all goods and services are valued and priced. The new foreign currency (typically, dollar, euro, etc.) becomes a measure of the relative worthiness of goods and services. As a result, the domestic medium of exchange, national currency, becomes different from the numeraire, the new adopted currency. The most-often adopted foreign currencies are the U.S. dollar and the euro.

There are three types of dollarization, official or full, semiofficial, and unofficial. Official dollarization is a complete substitution for a local currency of a foreign currency, which becomes the only legal tender in a country. Examples of official dollarization include Panama (1904, U.S. dollar) and Nauru (1914, Australian dollar). Semiofficial dollarization, or a bimonetary system, is characterized by simultaneous usage of national and foreign currencies as legal tenders. Examples of semiofficial dollarization include the Bahamas (1966, Bahamian dollar and U.S. dollar) and Bhutan (1974, Bhutanese ngultrum and Indian rupee). Unofficial dollarization is the use of a foreign currency in private transactions without official acceptance of the foreign currency as a legal tender. Many developing countries have experienced unofficial dollarization.

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