The Value Of The Currency Alone Will Not Improve The Trade Balance

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.

Currency intervention is the action of one or more governments, central banks, or speculators that increases or reduces the value of a particular currency against another currency – this is according to Wikipedia.

In 2013, America imported over 440,433.5 million dollars’ worth of goods from China but only exported 122,016.3 million dollars. (U.S. Census Bureau Foreign Trade) If America and other countries trade so frequently with China and rely so heavily on Chinese manufacturing, production, and innovation, then the aspect of currency manipulation within China and its potential negative effects on world trade is a very significant topic of importance and reason to research the subject. Our

The value of a country 's currency also plays a role in how other markets will do within that country. If a country 's currency is weak, this will deter investment into that country, as potential profits will be eroded by the weak currency. (Unique features of the forex market may allow larger players to get a jump on smaller ones; The Participant Effect

A country intentionally lowering the value of its currency may not seem like it would be beneficial to the country’s economy, but this practice does in fact have its advantages, which is why some countries have used it. To do this, a country, for example China, would overprint its own currency and then use that currency to buy U.S. dollars, which decreases the amount of U.S. dollars. This means there is more of China’s currency, the renminbi, relative to U.S. dollars. With more of China’s currency in the market, the renminbi’s worth decreases (Forbes article). With China’s currency worth less, Chinese goods are cheaper, so the U.S. and other countries’ demand for exports from this country increases. This demand in exports helps China’s economy grow. This is overall consistent with what we talked about in class and with economic law in general: an increase in the price level will increase aggregate demand for goods and services (Mankiw 20-3). According to Chapter 19, section 19-3c of the textbook, a country’s currency can also weaken in foreign exchange markets when the country sees an increase in capital outflow. This is because the outflow becomes inflow in another country, say, the United States, and this increase in inflow strengthens the

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.

In the past couple decades, the United States’ international trade flow has affected the account balance greatly. Since the ongoing trade deficit has resulted in a constant current account deficit. Earnings on United States’ investment and assets owned in the international market is a very small part in the account system, and the surplus in this category is not big enough to balance out the huge trade deficit. In the broad spectrum, the account deficit indicates that the value of the goods and services bought outside the United States’ territory goes beyond the value of goods and services being sold to foreign parties. The United States current account deficit has been getting bigger since 1990s and reached a new record and global high of

“Economists define government intervention in the foreign exchange market as the buying or selling of foreign exchange for the purpose of manipulating the exchange rate. “(Case, pg. 398)

With a free floating exchange rate, the value of the currency is simply determined by supply and demand of the market. The Central Bank cannot set a target exchange rate and intervene in the market exchange rate for this purpose.

One of the greatest example when a country moved towards managed exchange rate regime is France after World War I. France had the stable currency, Franc since 1803 but during the war there was huge emission of notes due to which the price level shoot up. In 1924, the country was nearing defaults when the government intervened and took many measures to stabilize the currency. It cut down expenditures, increased taxes, increased capital inflows. A new ceiling was introduced on money in circulation which resulted in ceasing of treasury bonds. All of these measures led to accumulation of foreign reserves and thus the value of Franc increased in the world market and the currency reached to 80% of its pre war

For quite sometime the Yuan exchange rate has drawn massive criticism from developed countries, especially the US. This is because critics believe the Yuan is undervalued and therefore gives China’s exporters undue advantage. True to that, China has positioned itself as an export destination. Immediately in 1994 after it deliberately engaged in measures to undervalue its currency by adopting a pegged exchange rate regime, China transformed itself from trade deficit to trade surplus country. Even after dropping its fixed exchange rate regime in 2005, China has been accused severally of continuing to deliberately undervaluing its currency. However, an article reported on 16th November 2011 by Wall Street Journal indicated that the recent

Fluctuations in the value of foreign currency impose a direct cost on foreign airlines as crude oil is purchased in accordance with the US dollar to which it is pegged. Airline companies in North America, which are associated with the SPDR S&P Transportation ETF, benefit from the fact that crude oil prices are denominated in U.S. dollars; as opposed to airlines from other regions that are susceptible to fluctuations in the exchange rate as well as the overall price of crude oil per barrel. For example, Brazilian airline Gol Linhas Aéreas Inteligentes’s fuel costs accounted for 42% of its operating costs, in comparison to its US rivals such as American Airlines and Delta Airlines. (IATA, 2015)

Exchange rates are very important policy that a government must decide on how to implement them. The exchange rate can effect on the economy and the actors who participant in them, thus each actor wants a policy that will benefit themselves. If a government is not too care, with could enter a currency crisis as witnessed in Mexico. To understand what exchange rate policy, the government should enact, it should understand how the actors’ attitudes. In this paper for instance, three different actors all responded differently to the question “How many problems do exchange rates cause for your business?” The results are, in a country that experienced appreciation tradable producers were much unhappier with the exchange rate than non-tradable producers, exporting firms were unhappier about the exchange rate if they were located in a country with a floating exchange rate compared to non-exporting firms, and lastly government owned firms were less likely to show unhappiness with exchange rate no matter their industry, export-status, or country. Economic actors will want the exchange rate regime to benefit them and make them prosper, thus they will support any policy that will favor their interest. In these cases, those policies are not appreciation for tradeable producers and not floating exchange rates for exporting firms. To understand why each actor reacted the way it did, theories about the exchange rate can be applied.

Exchange rate is regarded as “the value of one country’s currency in terms of another currency” (Arthur & Sheffrin, 2003), which means when one country’s currency devalues, its exchange rate devalues concurrently or vice versa. Hence, the exchange rate uncertainty has a crucial impact on international commerce (Soleymani & Chua, 2014) and on exporting and importing enterprises in particular. The cost, price and profit of those companies are strongly influenced by the changing exchange rate. In terms of domestic enterprises, when exchange rate devalues, the import prices rise which means the cost of their product is getting higher. In terms of foreign enterprises, when exchange rate appreciates, prices of goods rise which may affect sales of domestic enterprises (Harmon, 2014).

As mentioned before, there is no universal solution to the monetary policy governing exchange rates. A general rule, however, is that floating exchange rates provide a country with more adaptability and independence in fluctuating international economic circumstances. But they can lead to instability, needlessly expansionary policy and excessive speculation. Fixed exchange rates, in contrast, are