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Economics importance in real life
Exchange rate
Economics importance in real life
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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. With China's deepening Opening Up and economic restructure adjustment and the continuous appreciation of RMB in recent years, the issue of RMB exchange rate becomes the focus of attention inside and outside the country. However, affected by the financial crisis, China's real economic growth slows down, and businesses are facing difficulties in corporate operations, and the domestic employment situation is even grimmer. Besides, there are findings that with the appreciation of the US dollar from the 1970s to 1990s, many industries were losing jobs. Therefore, studying the impact of the RMB exchange rate changes on employment has important practical significance. 1.2 Review of domestic and foreign researches 1.2.1 Review of theoretical studies A number of studies have attempted to measure the effects of exchange rate fluctuations on domestic employment adjustment at home and abroad. Theoretical studies analyze mainly from the mechanisms and pathways that exchange rate changes affecting labor demand. Simon and Michael (1998) argue that both the elasticity of employment to exchange rate and the speed of adjustment to exchange rat... ... middle of paper ... ...ially in construction and at the aggregate level. If the real exchange rate of dollar appreciates by 1% unexpectedly, the aggregate employment will decrease by 0.09% (significant at 10%) and the employment rate in the construction sector will decrease by 0.34%, which is significant at 5%. [6] Klein and Triest (2003) use the data of American manufacturing sector from 1973 to 1993 and analyze empirically, finding that exchange rate changes reallocate workforce. In direct quotation, the real exchange rate depreciation contributes to job destruction. Further study shows that trend real exchange rate changes significantly affect the labor force reallocation rather than net employment level, while cyclical real exchange rate changes affect net employment only by job destruction. And they expect the impacts to be larger with the industries gradually to be more open [7].
The real exchange rate tells us the rate at which we can trade the goods of one country for goods from other countries. The real exchange rate some- times referred to as the terms of trade. To view the exchange rate relationship in real terms using the nominal exchange rate, can be taken samples h a goods produced in some countries, such as cars. Suppose the price of the car with 25,000 dollars, while the price of Japanese cars is 4,000,000 yen . To compare the prices of both cars , we have to transform them into a common currency. If one dollar worth of 80 yen , the price of cars Americans to 80 x 25,000, or 2,000,000 yen. By comparing the price of an American car (2,000,000 yen) and the price of Japanese cars (4,000,000 yen), it can be concluded that the price of the American car is half the price of Japanese cars . In other words, pad a price effect we can swap two American cars to get a Japanese car . Peng count can be written as
Inflation means the increase in household spending necessary to maintain a constant standard of living. Also, Inflation in the economies of the currencies that are traded is an important factor to consider because it affects the relative value of these currencies internationally and because it can decide future policy adjustments by governments and central banks. Besides, Inflation is usually measured by governments that use groups of price levels for goods in different sectors known as price indices. These include measures such as a producer price index (PPI), which measures wholesale inflation, and a consumer price index (CPI), which measures inflation for consumers. Governments and central banks often use these indices to help decide their
So when the dollar is depreciating, the exchange rate becomes smaller. Exchange rate (foreign exchange rate, forex rate or FX rate) is the number of units of a given currency that can be purchased for one unit of another currency. The United States capital markets are becoming more attractive to foreign investors. Since the dollar is falling, it makes foreigner’s investment in the United States more affordable. Therefore, foreigners take this opportunity to invest in the United States.
Economic indicators often affect and influence the value of a country's currency. The Trade Deficit, the Gross National Product (GNP), Industrial Production, the Unemployment Rate, and Business Inventories are examples of economic indicators. We will be dealing with four specific indicators: interest rate, inflation, unemployment, and employment growth, as well as Real Gross Domestic Product (GDP). Real GDP is so called because the effects of inflation and depreciation are accounted for in the figures. The state of the economy is important both on a micro and macroeconomic level.
Historically, this is outlined in the domestic societal framework (a rationalist point of view dictating political outcomes as a direct result of domestic material interests in society). Whatever society wants, society gets, leaving the consumer is to benefit from a fixed exchange rate. Competition exists between all interests. Whatever interest dominates takes the winning interest. The winning interest, then, determines the outcome. With businesses facing pressure to decrease domestic prices, consumers now have the upper hand. (Wellhausen, 10-2-14). Thus, due to the enhancing credibility of the government, consumers also are to benefit from a fixed exchange rate. (Multiple governments
Bureau of Labor Statistics. This report reveals the unemployed rate in the US, except government, farm and non-profit workers. That covers some 80% of the US working force. A decrease in the unemployed rate, i.e. there are more people working, usually indicates the market is growing. As a result the American Dollar will grow stronger. If a trader speculated that beforehand, and opened buying positions prior to the announcement – the outcomes would be to his favour. Naturally, if the unemployed rate rises the Dollar will weaken. Either way, the NFP and the speculations beforehand will cause vibrations in different
4. To what extent, if any, have you and your co-managers adapted your company's strategy to take shifting exchange rates into account? In other words, have you undertaken any actions to try to (a) minimize the impact of adverse shifts in exchange rates or (b) capitalize on the impact of favorable exchange rate shifts? Why or why not?
Organizations exporting to countries such as Mexico where the Peso is far weaker than the US dollar, experience less costs as exorbitant tariffs charged to organizations of non-NAFTA countries are eliminated by the trade agreement resulting in larger profits for exported goods and services. Though the Peso is weaker than the US dollar, the exchange rate is stable with only minor changes providing additional advantages and further reducing risks to US organizations in engaging in trade with Mexican
Other types of exchange rate risks are translation risk and so-called hidden risk. The translation risk relates to cases where large multinational companies have subsidiaries in other countries. On the financial statement of the whole group, the company may have to translate the assets and liabilities from foreign accounts into the group statement. The translation will involve foreign exchange exposure. The term hidden risk evolves around the fact that all companies are subject to exchange rate risks, even if they don’t do business with companies using other currencies. A company that is buying supplies from a local manufacturer might be affected of fluctuating foreign exchange rates if the local manufacturer is doing business with overseas companies. If a manufacturer goes out of business, or experience heavy losses, it will affect all the companies it does business with. The co...
Zhu, Y. & Warner, M. (2000). “An Emerging model of employment relations in China: a divergent path from the Japanese?” International Business Review, 2000, Vol.9 (3), pp.345-361. [03 April 2014]
Daniel M. Chin., Preston J. Miller. (1998). Fixed vs. floating exchange rate: A dynamic general equilibrium analysis. European Economic Review 42 (1998),
The stability of currency values plays a significant role for economic and financial stability. It is not difficult to see the exchange rate fluctuations are widely regarded as damaging. As the movements of the exchange rate have significant and large effects on the trade balance, resource allocation, domestic prices, interest rate, national income and other key economic variables. Then can exchange rate movements be predicted by these fundamental economic variables?
The foreign exchange market is one of important mechanism in the international business because foreign exchange is an intermediary for all nations in term of the growth of the economy. There are many functions of foreign exchange market in the global economy. In the international business, it uses the foreign exchange markets in four ways. First, the pay...
As the foundation for the foreign exchange process, exchange rates are one of the most important elements in business, both internationally and domestically. Defined as the rate at which one currency may be converted into another, exchange rates are used by countries in order to purchase products or services from one another. When examining these exchange rates it is important to note that their two distinct types of rates used for global trade: nominal and real.
Daily in the USA about 38 million banknotes of various face value for total amount about 541 million dollars are issued (Facts about USA money).Dollars involve deep consequences both for the USA, and for other countries. Increase of its course relatively reduces the volume of export revenue in dollars, quite often involves more considerable, than change of an exchange rate, falling of the world prices, especially on raw materials. On the contrary, decrease in a dollar rate serves as the powerful tool promoting growth of the American export and a pushing off of competitors of the USA in foreign markets. At the same time import to the USA owing to effect of a rise in prices restrains. Thus, for the USA changes in the exchange rate of dollar anyway bring benefits and advantages.Reduction of leading positions of the USA in world economy is assisted by the international role of dollar which remains the main reserve and settlement means in world monetary system. Foreign currency reserves of the central banks of other countries for 61% consist of dollars, nearly 2/3 calculations in world trade are carried out in dollars; the dollar serves as a measure of value of many important goods (for example: oil) in the world market; in dollars 3/4 international bank crediting is made (Aleksandr Popov). Changes in the exchange rate of dollar involve deep consequences both for the USA, and for other countries. Increase of its course relatively reduces the volume of export revenue in dollars, quite often involves more considerable, than change of an exchange rate, falling of the world prices, especially on raw materials. On the contrary, decrease in a dollar rate serves as the powerful tool promoting growth of the American export and a pushing off...