The Determinants Of Exchange Rate Essay

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.

An increase in the exchange rate of the U.S. dollar relative to a trading partner can result from

This research is being submitted on June 14, 2010, for Mr. Bergeen’s Microeconomics course at Rasmen College by John Divler.

One important determinant of a country 's exchange rate in the long term is whether it has a higher or lower inflation rate than its trading partners. The theory of purchasing power parity (PPP) suggests that the exchange rate between two countries will adjust to ensure that purchasing power is equalised in both countries. If a country 's inflation rate is persistently higher than that its trading partners, its trade-weighted exchange rate will tend to depreciate to prevent a progressive loss of competitiveness over time. In addition, political events can also impact the exchange rate, as seen with the ‘Malcolm Turnbull effect’ which lifted the Australian dollar. The Australian dollar, at US70.68c broke US71c in overnight trade after Turnbull discussed the need for economic reforms to counteract "challenges" facing the slowing local economy. Shortly after Mr Turnbull was confirmed as the victor against Prime Minister Tony Abbott, the dollar additionally rose one-third of a cent.

In an open and deregulated economic environment, exchange rates can play an important role in macroeconomic management for stability and growth. The increasing role of exchange rates since the early 1970s has indeed been a break from the Bretton Woods tradition of the 1950s and 1960s that assigned a limited role for exchange rates in economic affairs. However, the banking and currency crises of the 1990s that afflicted many developing countries in different regions have provided a somber lesson that in a global economic setting, exchange rate policy, and monetary and financial policy more broadly, cannot be

Such a process can be very time consuming and imprecise, without, of course, having a market currency price to begin with. The exchange-rate system is an important topic in international economic policy. Policymakers and journalists often seem to treat the choice of exchange-rate system as one of the most important economic policy choices that a national government makes, on a par with free international trade. Under most circumstances and for most countries, a system of freely floating exchange rates is likely to be a better choice than attempting to peg the exchange rate.

The exchange rates is a complicated concept that derives a relationship between the imports and exports. The exchange rate has also effect on the trade surplus and deficit. A weaker currency will make imports more expensive than the exports and a strong currency will make imports cheaper.

The proposed bill, Currency Exchange Rate Oversight Reform Act of 2013, is the thoughtful way to center the Chinese currency manipulation as the cause of economic downturn. Even though it has been six years after the Great Recession, there are approximately 8 million people unemployed and unable to enter the labor market. (Economic Policy Institue 2013) Since the Great Depression which ended in mid 1940s, United States has never been through such an economic downward in both national and global level.(Global Economic Crisis 2013) Due to the congressional dysfunction, the prospect for neither fiscal nor monetary policies to combat the sluggish economy has disappeared. Realigning exchange rate as the tool of macroeconomic stabilization could

There are many countries in the world that are known for currency manipulation in order to benefit from trade agreement and economic prosperity. Japan is the second largest currency manipulator in the world, while China is the leader in currency manipulation. Japan is responsible for growing U.S. trade deficit and numerous job losses in the United States. If Japan and other countries could eliminate currency manipulation, it would reduce U.S. trade deficit by $200 billion to $500 billion every year, and increase U.S. GDP by $288 billion to $720 billion. The elimination of currency manipulation would also create between 2.3 million and 5.8 million job in the U.S. The research paper evaluates the impact of currency manipulation by Japan

Understanding the relationships among world currencies is vital to successful operations in a global economy. There is money to be made by managers who can effectively manage exchange rates in the course of their business dealings. There is money to be lost by managers who fail to recognize the significance of these rate relationships.

Domely and Sheehy (1996) found contemporaneous relation between the foreign exchange rate and the market value of large exporters in their study.

Exchange rate as the relative price of 2 countries’ currency, it could have effects on both countries’ exports and imports. Fluctuations in exchange rate would increase the risk of uncertainty for business gain and loss. The appreciation of home country’s currency will lead products of home country are less competitive due to its price is actually higher in foreign country although there is no price increase from home country. And depreciation of home country’s currency will lead home country’s products are more competitive in international market. However, it could increase the possibility of anti-dumping investigations from foreign country against home country.

important in re-shaping this article. X. Sala-i-Martin has generously donated insight and time to try and make me understand. He need not, however, agree with all my statements below. All calculations were performed using the econometrics shell tsrf.

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 [1]. 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.

A fixed exchange rate regime will offer an economy greater stability in international prices and therefore encourage trade. Additionally, for developing countries a fixed rate will assist in promoting institutional discipline as the country will adopt restrictive monetary and fiscal policies that foster an anti-inflationary environment. A significant weakness of a fixed rate is that it is subject to destabilizing speculative attacks which could lead to financial meltdowns and devastating economic contractions. A floating exchange rate regime allows central banks to combat macroeconomic factors such as unemployment, inflation, and interest rates without having to worry about the effect on exchange rates. However, developing countries whose economies depend on trade will be reluctant to allow their exchange rates to fluctuate freely.