The exchange rate of the local currency comes down due to interplay of demand and supply. The floating exchange rate system based on demand and supply is a self-adjusting mechanism in market economy. But, stability in exchange rate is very important for the growth of the economy. Therefore, the central bank of a country exercises its monetary authority to ensure that the local currency is traded around the desired or target exchange rate. The central bank closely monitors movements of exchange rate of the country’s currency. It will intervene in the market by resorting to open market purchase or sale of currencies to maintain stability or for influencing the exchange rate of the local currency in relation to foreign currencies. Spanjers (2009, p. 10) stated “As the expectation of stable exchange rates tends to promote trade and thus welfare, the monetary authority of each country commits itself to exchange rate targets.” Central bank also in its liquidity management through monetary policies influences money supply in the country with a view to regulate interest rates and keep inflation under control. Money supply in a country will also influence the behaviour of exchange rates. The interest rates and inflation are closely linked to the behaviour of the exchange rate. Gold standard system In Bretton Woods Conference in 1914 the participant countries have agreed to adopt gold standard system which envisaged economic discipline among the nations. But, it could not succeed in achieving the objectives mainly due to currency devaluation spree post-World War-I by the countries to maintain or improve their exports. While devaluation strategy was adopted to make the countries’ products competitive in the world market, in order to make the local products more competitive locally, they also introduced trade restrictions which made the imports costlier. These measures taken by the governments for protecting their national economies had severe impact on the international trade. To stem this tide in international economy, International Monetary Fund was created in Bretton Woods in 1944 with the aim of preserving global monetary order. The exchange rates of the currencies fixed in relation to US Dollar or gold could not work smoothly for a long period. Defending these fixed exchange rates has become increasingly difficult due to several factors. Under the fixed exchange rate regime the country has to continuously monitor the system and impose several restrictions on transactions involving foreign exchange. These restrictions are likely to encourage black market operations in foreign exchange. The question of devaluation of the currency for a country with fragile economy is the greatest cause for concern. The countries’ current account imbalances caused failure of the system because under consistent deficit in current account a currency cannot be kept artificially at a higher exchange rate. Stability in Floating exchange rates and economy The stability factor, being the major concern relating to exchange rates, could not be addressed in floating exchange rate system based on demand and supply for currencies as well. The process of self adjustment expected to come into play is affected by several factors. For example, when a currency becomes weak, the imports become costlier and exports more profitable and the volume of exports is expected to increase. The increased demand for local currency due to exports and
INTERNATIONAL ECONOMICS AND FINANCE Exchange Rates Introduction Exchange rate is one of the important measures of economic development of a country. Exchange rate of a country is governed by several factors. Increase in value of local currency makes country’s exports expensive in the global markets which will affect exports…
International trade is, therefore, an international exchange of a country’s product or services with another country. International trade contributes to a large portion of the Gross Domestic Product in many countries all over the world. In recent times, international trade has gained large importance in terms of social, political and economic aspects.
The paper details its relevance in the global economy. It also analyzes and details factors that influence, and factors that articulate around international finance. To explain International finance it is the study pertaining to the dynamics of exchange rates, foreign investment, trade deficits, capital inflows, and how these affect international trade.
In free trade, there is no tariff, factor movement and policy harmonization. Without any import duty or any other tax, trading is undertaken. In case of Economic union, there is a presence of everything:
While absolute advantage gives a nation an almost monopoly power over certain goods and services, comparative advantage ensures quality goods readily affordable at low price. According to Ricardo, economic
This rapid growth was because of the following factors. The gold average refers to the technique, which controlled the worth of exchanges around the world in expressions of a convinced quantity of gold (Staiger, 2006).
As a result of these unexpected changes, financial results international are greatly affected. Attempts to minimize the exposure to the changes in exchange rates gives an option engagig in short term contracts of
The report is based on the financial report generated from an analysis of cost and benefit prepared by Don Drummond, a US economic analyst. The report was about strategies of managing costs and incomes in the
Therefore, the driving force behind the establishment of foreign exchange market is the creation of a system that facilitates the conversion of a country’s currency into another (Sowa & Acquaye 1999, pp.
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