Before we look at these forces, we should sketch out how exchange rate movements affect a nation 's trading relationships with other nations. A higher currency makes a country 's exports more expensive and imports cheaper in foreign markets; a lower currency makes a country 's exports cheaper and its imports more expensive in foreign markets. A higher exchange rate can be expected to lower the country 's balance of trade, while a lower exchange rate would increase it.
Consequences regarding the international businesses and the flow of trade and investment among the three countries are given below as benefits and drawbacks of holding fixed exchange rate system-
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The economic performance of a country has an impact on its currency exchange rate. A country with political and economic stability will attract foreign investors and foreign capital which will lead to an appreciation of its currency while a country with political turmoil and poor economic performance will result in a depreciation of its currency. The GDP growth rate is used as a proxy to economic performance in the regression model. The GDP growth rate measures the rate at which an economy is growing. Chowdhury and Hossain (2014) used the GDP growth rate as an independent variable to examine the determinants of exchange rate in Bangladesh. They found that the GDP growth rate has a positive relationship
It is no surprise that there have been many literatures on the determination of exchange rates given the significant impact that movement in exchange rates have on a world’s political and economic stability as well as the welfare of individual countries. It plays an important role in international investments, company profits and a countries macroeconomic fundamental factor such as unemployment, wages and interest rates among others. This has led to the development of many models and economic theories, one of which is the monetary model. Despite this, economists still cannot agree as to which model best explains movement in exchange rates because the results obtained when testing different models often contradict one another.
?The increased importance being attached to exchange rates is a result of the globalisation of modern business, the continuing growth in world trade relative to national economies, the trend towards economic integration and the rapid pace of change in the technology of money transfer.? (Copeland, Laurence S. 2014). In 21th July 2005, Chinese authority announced that the exchange rate system changed, from the dollar peg to the floating basket peg system. Recently, since the volatility in the forex market is growing, which makes there is increase concern about forecasting of exchange rate movements. (Schnabl, 2008).
Exchange rate represents the external value of a currency. Changes in exchange rates may affect the relative position of a country in the international trade. Politicians and economists concern about exchange rate variability for lots of reasons, among which that the exchange rate variability discourages trade comes first. However, a large empirical literature on this issue does not confirm a significant effect of exchange rate on the volume of trade . Instead other variables such as employment should be much more important from a practical point of view, for it is closely related to people’s livelihood.
where M is the amount of currency in the economy during a given year, V is the velocity of circulation of money, M’ is the volume of demand deposit in the economy during the year, V’ is the velocity of circulation of demand deposits, and is the sum of (i) the average price, P, of a commodity purchased in the economy during the given year multiplied by the quantity, Q ,of it purchased, (ii) the average price, , P’ of another commodity purchased during the given year multiplied by the quantity of it purchased, and (iii) for all
International trade flows are the exchange of goods and services for money between different countries. It is referred to as sales which cross juridical borders. Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the price levels rises, each unit of currency buys fewer goods and services. Exchange rates between two currencies specify how
In this system, each country adopts a certain monetary unit with, more or less, fixed par value, based generally upon its gold content. This par value is made the basis of its exchange rate with other national standard momentary units, and this announced exchange rate remains stable or permanent for some time before it is officially changed.
In this paper, I will only focus on discussing the Purchasing Power Parity (PPP) and I will divide this paper into four sections. In section 1, I will come up with the definition of PPP and other theories behind it. For section 2, I will briefly introduce the absolute PPP and relative PPP and empirical evidence on PPP. Section 3 explains empirical test of PPP in practice and the problem of PPP. For the last section, there are conclusion and remarks.