How does the exchange rate affect international trade?
Monday, September 27th, 2010 at
7:27 am
I need some key points to discuss when talking about the exchange rate and how it effects international trade. This involves how vice-verse thinking such as policies that effect the exchange rates.
Tagged with: exchange rate • exchange rates • international trade • vice verse
Filed under: Economy
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Say a burger costs $1 and a casio watch Y1000. The exchange rate is $1 = Y100
Now let the $ appreciate, now $1 is worth Y200.
The Japanese customer now has to pay Y200 to get the $1 burger.
Hence as the $ apprecistes, foreigners feel exports are more expensive, and buy less of them.
On the other hand, the US customer now only parts with $5 for a casio watch compared to $10 earlier.
Hence as the $ appreciates, residents feel imported goods are cheaper and buy more of them.
An appreciation of the currency causes exports to fall and import to rise, and vice-versa.
SOme countries, say like CHina has been accused of doing, want to keep their currency low, so exports look cheap to foreigners and they export more; on the other hand, they import less.
Some countries, like SIngapore did a few years ago, prefer a strong currency, make imports cheaper but exports more expensive, to encourage domestic firms to stop relying on low-value-added/cheap’ exports move to higher value added goods where the businesses have higher margins and can handle the appreciating S$.
Hence exchange rates affect trade by affecting the relative prices of goods, however, depening on the aims of an economy, the foreign exchange policy will vary.
Exchange rates affect how much of one currency it takes to buy something in another country. The stronger your currency, the more you will import and the less you will export.
Exchange rate is a price of export and import goods.There are two of them, a market exchange rate and a price parity exchange rate. Economists will compare the two rates to identify wheather it is over or undervalued. The Chinese Yuan is undervalued. That make Chinese made goods in the US so cheap, and US made good in China so expensive. This cause the outsourcing from theUS to China, and the outflow of foreign investment from the US to China.If the Chinese central bank allowed the YUan to move freely, the Yuan market rate will be apprecated. The cheap Chinese made product will be going to the end. That’s called fair trade in the eyes of Americans.
Exchange rate is extremely important in international trade because countries, businesses, and individuals need to know how much of their currency can buy in a different countries currency.