Premium Essay

Exchange Rate and World Trade

In: Business and Management

Submitted By salenaweekly
Words 996
Pages 4
INTRODUCTION

Objective

The general objectives of this study are to describe recent trade problems and examine why these problems are related to, and affected by exchange rates. The study first examines the exchange rate and how it is determined. The study will explore, in detail, the agencies that determine these rates. This study will also present the pros and cons of different prices of goods and services in different countries. Specifically, this paper:

(1) defines recent trade problems and how they are affected by the exchange rate; (2) describes the steps taken within the agencies that determine the exchange rates; (3) examines the impact of these rates, both good and bad; (4) analyzes the costs of similar goods in the U.S. and in foreign markets; (5) discusses the pros and cons of the exchange rate and how it affects trade; (6) examines various exchange rate systems: floating, fixed, and dirty floating.

Limitations of the Study

The topics of exchange rate and trade both have a variety of factors that cause changes. As with any study that attempts to explore current developments in the economy, it is hard to keep information current. It is also virtually impossible to report on the status of every single government that is involved in the exchange market. One of the limitations of this study is to report on up-to-date values of currency while choosing a sample of governments that accurately represent the world economy. Therefore, the solution was to use stastical figures from magazine articles and books that were written within the previous year. Also, the countries that were chosen to be studied are considered to play a significant role in the exchange rate market.

Plan of the Paper

This study first examines the relationship between the exchange rate…...

Similar Documents

Premium Essay

Exchange Rate

...101579 4. Nguyễn Đỗ Thiên Trang 093304 Note for faculty: Date: ___/___/___ For the writer: (Signature & full name) 2012 – 2013 CONTENTS CONTENTS i INTRODUCTION ii I. Exchange rates 1 I 1. Exchange rates 1 I 2. Exchange rate regimes 2 I 3. Roles of exchange rates 3 II. Compare and contrast between the value of VND and the others of ASEAN 5 II 1. The exchange rates in Vietnam from 2008 to 2010 6 II 2. The exchange rates in Vietnam in 2011 8 III. Impacts on exchange rates 10 III 1. Balance of Trade 10 III 2. Balance of Payments 11 III 3. Monetary Policy 12 III 4. Differentials in Inflation 12 III 5. Differentials in Interest Rates 12 III 6. Public Debt 12 III 7. Speculation 13 III 8. Employment Outlook 13 III 9. Political Stability and Economic Performance 13 IV. Adjusted policies of Vietnamese government on exchange rates 14 Recommendation a REFERENCES e INTRODUCTION Since Vietnam began to implement the open door policies and integrate into the world economy, Vietnamese trade has jumped by a so large amount, especially after Vietnam becomes a member of WTO. In reality, Vietnam has currently established diplomatic relationships with 171 countries from all over the world, and trade ones with 165 nations and territories. These results bring not only opportunities for Vietnam, but also many a challenge to the young economy. As a result of real need – “How to compare as well......

Words: 6250 - Pages: 25

Premium Essay

Exchange Rates

... An open economy is a market economy that is free from trade barriers and restrictions. There is no control over movements of labor and capital. Furthermore exports and imports form a large portion of the Gross domestic product. In an open economy some output is sold domestically while some is exported to be sold abroad. Expenditure on an open economy’s output Y is usually composed of four components: consumption of domestic goods and services, investment in domestic goods and services, government purchases of domestic goods and services, exports of domestic goods and services. An open economy macroeconomics is about fluctuations in aggregate economic activity, employment and inflation and about monetary and fiscal policies. Emphasis is on how a country’s relations to the rest of the world influence the fluctuations and forms the scope for economic policies. The national income accounts in an open economy is as follows Y= C+I+G+NX ; where C= consumption I= investment G= government purchases NX= net exports (exports-imports) CAPITAL FLOWS AND TRADE BALANCE Begin with the identity Y = C + I + G + NX. Subtract C and G from both sides to obtain Y − C − G = I + NX. Y − C − G is national saving S, which equals the sum of private saving, Y − T − C, and public saving, T − G, where T stands for taxes. Therefore, S = I + NX. Subtracting I from both sides of the equation, we can write......

Words: 661 - Pages: 3

Premium Essay

Exchange Rates

...1 Explain how foreign exchange rates are determined. How do changes in interest rates, inflation, productivity, and income affect exchange rates? What are the advantages and disadvantages of a weak versus a strong dollar for imports, exports, international and domestic markets? Explain how foreign exchange rates are determined? Foreign exchange rates exist because banks buy and sell foreign currencies from other countries in large quantities. Exchange rates exist in the U.S. dollar, Europe euros, Japanese yen, British pounds, Canadian dollars, Australian dollars, and much more. There are currently two main systems that are used to determine a currencies exchange rate. The floating currency sort of works like the supply demand method. This system is normally used for countries that are in a stable economy. These exchanges are considered more efficient because the market will correct the rate to reflect inflation and other economic forces automatically. The downfall of this system is that it can discourage investment. The other system is a pegged or also known as a fixed system. This is the system that is used when an exchange rate is set and artificially maintained by the government. The rate will be pegged to other countries dollar and does not fluctuate from day to day.  How do changes in interest rates, inflation, productivity, and income affect exchange rates? Exchange rates affect different areas in the economy such as interest rates, inflation, productivity...

Words: 377 - Pages: 2

Premium Essay

The Foreign Exchange Market & Exchange Rate

...and or sell goods. The foreign exchange market is a place where the transactions in foreign exchange are conducted. In practical world the external transaction requires the use of foreign purchasing power i.e. foreign currency. The foreign exchange market facilitates such transactions by performing number of functions. Definitions of Foreign Exchange Market According to Paul Einzig, "The foreign exchange market is the system in which the conversion of one national currency in to another takes place with transferring money from one country to another." According to Kindleberger, "It is place where foreign moneys are bought and sold." In simple words, the foreign exchange market is a market in which national currencies are bought and sold against one another. There are large numbers of foreign transactions such as buying goods abroad, visiting foreign country for any purpose. Corresponding nation in whose currency the transaction is to be fulfilled. The foreign exchange market provides the foreign currency against any national currency. However, it is to be understood that unlike other markets, this market is not restricted to any particular country or any geographic area. There are large numbers of dealers' instruments such as exchange bills, bank drafts, telegraphic transfers (TT), etc. There are certain other dealers such as brokers, acceptance houses as well as the central bank and treasury of the nation. Functions of Foreign Exchange Market a) Transfer......

Words: 4258 - Pages: 18

Free Essay

Exchange Rates

...Friday, May 3, 13 Principles of Macroeconomics Exchange Rates People, firms and nation exchange products for money and use the money to buy other products to pay for the use of resources. Within an economy, prices are stated in the domestic currency, such as US dollars to European euros. Buyers use their currency to purchase goods. International markets are different. Producers in other countries who export goods want to be paid in their own currencies so they can carry out transactions. As a result, a foreign exchange market develops where national currencies can be exchanged. Such markets serve the need of all international buyers and sellers. The equilibrium prices in these markets are called exchange rates. An exchange rate is the rate at which the currency of one nation is exchanged for the currency of another. The foreign exchange market is the financial relationship between countries that makes it possible for international trade to be accomplished more efficiently than barter. Because each nation uses its own monetary unit, people in one country who want to purchase something in another country must exchange their own currency for the other to accommodate the transaction. Many travelers will research foreign exchange rates before purchasing cheap airline tickets or other means of travel to other countries. Depending on the destination, some travelers can benefit greatly from exchanging currencies .The foreign exchange market is where one nation's currency is......

Words: 1094 - Pages: 5

Premium Essay

Exchange Rate

...Archive Optimal choice of an exchange rate regime: a critical literature review Mariam Ouchen Cadi Ayyad University, Faculty of Economics Marrakesh Morocco, University of Basel 17. January 2013 Online at http://mpra.ub.uni-muenchen.de/43907/ MPRA Paper No. 43907, posted 21. January 2013 12:56 UTC Optimal Choice of an Exchange Rate Regime: A Critical Literature Review 1 Mariam OUCHEN Laboratory of innovation, responsibility and sustainable development Cadi Ayyad University, Faculty of Economics Marrakesh Morocco Center of Macroeconomics and economic theory University of Basel Abstract :This paper set out to review the main theories and empirical methods employed in selecting an appropriate exchange rate regime.In order to achieve this, the paper is organized as follows : Section 2 introduces the distinct classifications of exchange regimes(de jure exchange rate regimes versus the facto exchange rate regimes), and the different theoretical approaches which illustrate how an optimal exchange rate regime is determined . Despite their initial popularity, the theoretical considerations have not escaped criticism.Section 3 reviews the criticism of these theories.A conclusion is provided in Section 4. Keywords :  Exchange rate regime, the structural approach, credibility, flexibility, the bipolar view. 1 - Introduction The literature on the selection of exchange rate regimes can be divided into three main groups : the structural approach, the trade-off between credibility and......

Words: 10108 - Pages: 41

Premium Essay

Exchange Rate

...Volatility of exchange rate The main objective of this research is to present a rationalized concept of the theory and composition of exchange rate that are compulsory to solve the important economic problems facing the economy in the country, like volatile exchange rate, unbalanced financial circumstances and frustration of government to have control over domestic money market. “Exchange rate” shows that how much unit of onenation’s currency can be purchased with one unit of domestic currency. More precisely, exchange rate is a conversion factor that determines rate of change of currencies. While exchange rates volatility shows that exchange rate is settled on demand and supply of one nation’s currency, it may turn out fastest moving price of currency and bring all the foreign capital in the economy. Exchange rate volatility can influence the decisions of policy makers and affect the volume of exports and imports. It can also affect the allocation of manufacturing of goods, reserve money, exports, imports and balance of payments. Exchange rate volatility provides chances to domestic investors to invest in foreign currency to obtain higher profits and thus domestic currency undervalue and foreign currency gain values. Moreover, this volatility of exchange rate directly influences the prices of exports, imports, reserve money, manufacturing productions and their growth rates. Traders and investors always support the system where the discrepancy of the difference between......

Words: 4807 - Pages: 20

Free Essay

Exchange Rate

...Impact of Exchange Rate Adjustments and Its Effects on the Balance of Payment The persistency and size of a country’s imbalance payments whether surplus or deficit and the adjustment needed to correct it, depends upon the exchange rate system used. There are two types of exchange rates. 1. Floating or Flexible Exchange Rate, the supply and demand of the currency determines the rate the countries will exchange. No involvement of the Government takes place. Example of floating exchange rate is US Dollar. 2. Fixed or Pegged Exchange Rate, this system is dominated by the Governments of countries managing the rates at which the currency exchanges, and take proper measures to ensure continuation of rates. Example of Fixed or pegged exchange rate is China’s Yuan. (Investopedia, 2013) Depreciation of currency, that is the decrease in currency exchange rate, affects a country’s balance of trade through changes in the imports and export. A trade deficit nation might be able to reverse the imbalance by lowering the relative prices increasing the demand of local goods both domestic and internationally, henceforth increasing exports and decreasing imports. The country can lower the relative prices by allowing its exchange rates to depreciate in the free market or by deliberately devaluing its currency by Government intervention.(R.J. Carabaugh, 2011) For example, China in the past years has shown a surplus in balance of payments, this has majorly been due to the Chinese currency......

Words: 379 - Pages: 2

Free Essay

Spot Rate Exchange Rate

...Critical Thinking, (Spot Exchange Rate) The interest rate on South Korean government securities with one-year maturity is 4%, and the expected inflation rate for the coming year is 2 %. The interest rate on U.S. government securities with one-year maturity is 7%, and the expected rate of inflation is 5%.The current spot exchange rate for Korean Won (W) is $1 = W1,200. Forecast the spot exchange rate one year from today (Hall, p. 318). The forecast spot exchange rate one year from now will be W1,166.35. Explain the logic of this answer? The logic for the above answer begins by understanding the meaning and relationship between Spot, Exchange Rate, Interest Rate Parity, and Fisher Effect. 1. Spot Exchange Rates The interaction between supply and demand influences the exchange spot rate. The spot exchange rate is the daily rate which one currency is converted into another. 2. The Fisher Effect In foreign currency transactions between two countries, the spot exchange rate changes in equal amounts as it moves the opposite direction to the difference in nominal interest rates between two countries. According to the Fisher effect, only the interest rate and not the inflation rate are used for calculating the spot interest rate. 3. Interest Rate Parity The differences in currency values pertain to short-term interest rate differences between two countries. The real int. rate in the United States is 2% (7-% maturity – 5% expected inflation). The real interest......

Words: 486 - Pages: 2

Premium Essay

A History of World Exchange Rate Mechanisms.

...Abstract This paper shall discuss the Gold Standard, the Bretton Woods System and the European Exchange Rate Mechanism with a view to analysing their respective advantages and disadvantages; along with the circumstances surrounding their emergence and failure. Through this lens the author intends to draw comparisons between the current EMU and the Gold Standard and any implications these similarities have Introduction A prerequisite to any discussion on this topic is an understanding of certain classical and neo-classical analytical frameworks. Therefore section one will briefly present and explain the logic of Hume’s Mechanism and the ‘Impossible Trinity.’ Section Two outlines a chronological history of various exchange rate mechanisms along with their corresponding successes and failures. Section three draws parallels between the Gold Standard and the European Monetary Union and discusses the consequences of these similarities. Section One: Analytical Frameworks Hume’s Mechanism: This theory combines aspects of the purchasing power parity and interest rate parity conditions. It states that as the monetary base (M) increases domestic prices trend upwards. This induces a nation to import more goods than it exports, creating a current account deficit. This deficit gradually causes gold to leave the system, causing prices to revert back to their original levels- producing a balanced current account. This process in the goods markets is far slower than the......

Words: 2790 - Pages: 12

Premium Essay

Exchange Rate

...Abstract INTRODUCTION When first looking at an exchange rates, and foreign exchange, there are a few questions which must be considered. What factors affect the demand and supply of Australian dollars in the foreign exchange markets? Distinguish between the possible causes and effects of currency depreciation and a currency appreciation on the Australian economy. What forces have come into play, if any, in the past few years that have affected the value of the Australian dollar? In addition to looking further into those questions, it is helpful to know what the word Exchange Rate means; it is defined as, “The rate at which one unit of domestic currency is exchanged for a given amount of foreign currency.”  A BRIEF HISTORY OF THE AUSTRALIAN DOLLAR Until 1971, the Australian dollar (AUD) was “pegged” to the British pound. This meant that the AUD rose or fell in line with the pound. In 1971, the AUD became pegged to the US dollar instead. These currencies were fixed currencies, which meant that the Australian currency would only change value when a major world currency also changed. This system lasted only until 1974 when the AUD became pegged to a trade-weighted selection of other currencies. This was still a fixed currency. In 1976 this selection of currencies became moveable. Small shifts were able to take place when needed. In 1983 the AUD became a floating currency. This means that the value of the dollar is determined by supply and demand. Initially, the......

Words: 3252 - Pages: 14

Free Essay

Exchange Rate Volatility and Rwanda’s Balance of Trade

...EXCHANGE RATE VOLATILITY AND RWANDA’S BALANCE OF TRADE By: MANIRAGABA, Ngabo Vallence vallencengabo@ines.ac.rw &: NKURUNZIZA, Fabrice nkurufabre123@ines.ac.rw ABSTRACT This paper examines the effect of exchange rate volatility and balance of trade sector in Rwanda for the period of January 1996 to December 2013, and tries to find appropriate models for both balance of trade and exchange rate to be used in forecasting for future values.. Some of the developing economies including Rwanda would appear to have exacerbated fluctuations in exchange rates, developing economies are special examples of high exchange rate, The impact of exchange rate levels on trade has been much debated but the large body of existing empirical literature does not suggest an indubitable comprehensive image of the trade impacts of exchange rate volatility in Rwanda. The review of the theoretical literature on this issue indicates that there is no clear-cut relationship between exchange rate volatility and balance of trade. This study examines the effect of exchange rate volatility and balance of trade sector in Rwanda The analysis followed the empirical methods (econometrics and time series analysis). The researchers used UBJ time series analysis to accomplish all stages (stationarity, identification, estimation, diagnostic checking and forecasting) of the models and models validation was of good quality and can be used in forecasting for future values. Polynomial regression model helped to establish...

Words: 8780 - Pages: 36

Premium Essay

The Exchange Rate

...The exchange rate An exchange rate is the rate at which one currency is exchanged on another one. This rate differs from country to country and depends on many economical variables, the main of which are the general balance and disbalance of economy, monetary and fiscal policy, the state of the budget, international policy, the condition and development of the country’s economy compared to the world situation and dominating countries, purchasing power of the currency, and other internal and external factors. The history of world exchange rate systems shows us that the world community (in its majority) has in fact shifted from the system of fixed exchange rates to floating exchange rate system. Currently there exist different combinations of floating and fixed exchange rate systems, together with specific economical instruments, created for exchange rate regulating. Since the development of production and a number of divisions of labor there existed such a phenomenon as commodity money. There was no other monetary system until 17th century when there appeared coins having an intrinsic value, not linked with commodity. Usually the value of the coin was associated with the content of gold in the coin. The exchange rate between different coins and different currencies depended on the content of gold in the coin as well, and equaled to the relative content of gold in the coins. In 17th century banks started issuing own banknotes which had the same purchasing power as...

Words: 2755 - Pages: 12

Premium Essay

Exchange Rate

...The current rate of Singapore’s dollar against the United States’ dollar is 1USD=1.39SGD The Singapore dollar has depreciate slightly since recent months, with rates going to as high as 1USD=1.43SGD on 5th October. The exchange rate between the Sing dollar and the US dollar has been relatively stable since last year, May 2014 to Aug 2014. However, the exchange rate has been rising consistently since Aug 2014. The appreciation of the USD, or the depreciation of the Singdollar was due to a weaker Singdollar. The Monetary Authority of Singapore (MAS), which uses the exchange rate as its main monetary policy tool made a statement in January 28, mentioning that the Singdollar will be seeking a slower pace of appreciation against a basket of currencies. Given that US is likely to be a large trade partner of Singapore, the exchange rate between Singapore and US is thus likely to be affected. The strengthening of the USD due to signs of economy recovery, and a slower rate of appreciation of the Singdollar, has translated to a depreciation of the Singdollar since August last year. However, there was a reversal in trend in April this year, where the Singdollar strengthened and appreciated against the dollar. This reversal in trend could be due to the MAS decision in April to refrain from easing monetary policy further, which is likely to have increase investors’ confidence, and putting a stop on investors’ expectation of a weakening Singdollar. It is highly likely that the......

Words: 1238 - Pages: 5

Premium Essay

Exchange Rate

...WORKING PAPER U.S. INTERNATIONAL TRADE COMMISSION How Do Exchange Rates Affect Import Prices? Recent Economic Literature and Data Analysis Cathy L. Jabara Office of Industries U.S. International Trade Commission Revised, October 2009 Cathy Jabara is a Senior Economist with the Office of Industries of the U.S. International Trade Commission. Office of Industries working papers are the result of the ongoing professional research of USITC Staff and are solely meant to represent the opinions and professional research of individual authors. These papers are not meant to represent in any way the views of the U.S. International Trade Commission or any of its individual Commissioners. Working papers are circulated to promote the active exchange of ideas between USITC Staff and recognized experts outside the USITC, and to promote professional development of Office staff by encouraging outside professional critique of staff research. This paper is a revised version of Working Paper No. 21 dated May 2009. The paper has been updated to include 4 lags in the exchange rate estimation, instead of 3, and a new equation for Latin America is included. JEL codes: F10, F12 Key words: Exchange rates, pass-through, U.S. imports Address correspondence to: Office of Industries U.S. International Trade Commission Washington, DC 20436 How Do Exchange Rates Affect Import Prices? Recent Economic Literature and Data Analysis Cathy L. Jabara U.S. International Trade......

Words: 6701 - Pages: 27