The Link between Trade Performances and Exchange Rate Movements

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.

determined by the flows of goods and the determinants of exchange rate in the long

Hint : When there is a change in the exchange rate, this would automatically alter the prices of all foreign goods to domestic goods, as the domestic prices are intertwined with the foreign prices. Thus, these changes would affect the trade flows between nations.

Exchange rates play a pivotal role in the relationships between individual economies and the global economy. Almost all financial flows are processed through the exchange rate, as a result the movements and fluctuations of the exchange have a significant impact on international competitiveness, trade flows, investment decisions and many other factors within the economy. Due to the increasing globalisation of the world economy, trade and financial flows are becoming more accessible

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-

Second, exchange rate overvaluation: enhances the impact of trade liberalization on inflation and competitvity. These policies are very effective against inflation, and can be very popular with consumers. However, their impact on the balance of payments, local industry, and employment can be destructive. Brazilian goods imports increased from US$20.6 billion to US$50.0 billion between 1992 and 1995. (Filho)

Mexico unilateral changes and NAFTA can be considered complementary explanatory factors. In this model, unilateral changes and NAFTA are treated as exogenous factors. A dummy variable with value one since 1986 to 1998 represent unilateral trade liberalization and a dummy variable with value one since 1994 to 1999 represents NAFTA contribution to liberalization. By these means, the impact of these two changes is compared against the base line of the previous stage (1970-82). Finally, the effect of exchange rate policies is controlled with the variable devaluation of the Mexican peso1. Two alternative measures of devaluation are used, the rate of change of the nominal exchange rate, and a dummy variable with value 1 for years when the rate of change was larger than 50%. Another alternative, not explored here, is to use the real exchange rate. benito@sonoma.edu, http://www.sonoma.edu/people/benito 1 In other studies about growth and trade, authors have used the real exchange rate as explanatory variable. Real exchange rates, however, are not policy variables directly controlled by policy makers. They are indirectly determined. Say, in an Australian type of model the real exchange rate is defined as RER = E. pt/Pn Where RER is the real exchange rate, E is the nominal exchange rate, pt is the world price of tradable goods, and Pn is the domestic price of non-tradable

The selection of exchange rate regimes has decisive implications on the behaviour of the nominal exchange rate. It is the key macroeconomic parameter that affects the behaviour of relevant nominal and real exchange rates including the balance of payments, inflation rate, employment levels and the GDP rate. It emerges from our analysis is that the Latin American countries have benefited from adopting more flexible exchange rate regimes to manage with global financial volatility. From the 2000s, almost all the major Latin American countries

In a fixed exchange rate regime, especially if the trade of a country is concentrated with those major currencies, the cross-rate fluctuation (the fluctuations of the anchor currency against other major currencies) is another severe flaw. For example, the Persian Gulf oil exporting countries follow a peg exchange rate to the US dollar and have most of their trade with Europe and Japan. In 1997, the appreciation of the US dollar

“Having endeavored to forecast exchange rates for more than half a century, I have understandably developed significant humility about my ability in this area…”[1]

We chose Japanese Yen as are benchmark exchange rate because Japan is part of the G-10 Countries with U.S. and one of the major economies in the world. Japan is also a Key U.S. Business Partner in importing and exporting goods and services. Through our findings we have developed our insight of the Japanese Yen being very volatile to the dollar. In the graph shown below, we can conclude that from 1995 till 1999 the Japanese yen was weaker against Dollar. The process has been repeated between the years 2001-03 and 2006-recent.

DISSERTATION TOPIC: THE RELATIONSHIP BETWEEN EXCHANGE RATE VOLATILITY AND TRADE (US TRADE IN GOODS, TRADE IN SERVICES AND TRADE IN GOODS AND SERVICES (1970-2014)

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 fixed exchange rate has given a fake sentiment of security in the southeastern Asian countries, (Thailand, South Korea, and Indonesia) this system has encouraged these countries to conclude a huge debt denominated by the U.S. Dollar, in additional to this the exports of these countries were weak in the mid-seventies because of , the high value of the U.S. Dollar against the Japanese yen, on the other hand China devalued its currency in 1994, the huge inward capital flows and the weakness of the exports had reflected on the widening of the deficits in current accounts as well as a significant portion of the inflows were in the form of a short-term loans, which leads these countries to an external distress.

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.