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Importance of international trade
What is the importance of international trade on the economy
Importance of international trade
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Recall that an exchange rate is the price of one currency in another. For example, it may take US $1.35 to buy 1 British Pound. Also recall the interest rates affect exchange rates. What do you predict will happen to the foreign exchange rate if interest rates in the United States increase more than in the UK? (In other words, which currency will become stronger?) How would such a change affect US exports to the UK? Would it be less expensive for an American tourist to take a vacation to London after the interest rate change? Be sure to clearly explain and justify your reasoning. If interest rates in the United States increase more than UK, I feel that global investors will definitely get a higher return from investing in the US, therefore investments will raise or increase and the demand for the dollar will rise relative to Pound. The outcome will be a higher price of a dollar. Now the dollar will appreciate and become stronger and pound will depreciate and become weaker. This is not a good sign for the UK at all. Therefore the exchange rate will decrease below $1.35 pound. For business or governments that trade billions of dollars even small changes in the exchange rate become …show more content…
So the demand for the US export will basically fall. While goods and services from the US will become more expensive for foreigners, causing import to rise and export to decline. A weaker dollar causes a reverse scenario. A more expensive imported goods and services decreases imports, while the American goods and services increases exports. The trade balance of any country is largely determined by the value of the domestic currency in relation to other countries. When the foreign exchange rate of a currency changes it takes at least several months before it has any effect on the volume of imports and
This is where a free trade policy comes in. In a free trade policy, tariffs are lowered, allowing more goods to be imported to the United States. Foreign nations will see the lowered tariffs in the United States and respond by lowering their tariffs on American goods. This will increase the overall trade between the United States and nations abroad. The Republican party would like to see a return to more protectionist policies.
Inflation is one of the main reasons for raising the interest rate, but currently inflation is not doing it usual numbers when it comes to a growing economy. It is expected for inflation to rise during this period but it is fact currently falling. So if inflation isn’t rising as expected that leads to the dollar being stronger than expect as well. Now a strong dollar is good and bad, it is bad because it will cause our exports to cost more for other countries. With a lot of other economies struggling recently the U.S. exports could take a hit because of lower conversion rates. Now if the Fed raises the interest rate to combat inflation the strength of the dollar may stay high, which in turn could hurt the export market of our
Thus, imports of American goods are under less competitive pressure to keep prices low. Thus, weak dollar benefits U.S. exports by making American goods cheaper in foreign countries. Foreign tourists can afford to travel and visit the United States. When the dollar is falling, foreign purchasing power is increasing. Purchasing power is the amount of value of a good or service compared to the amount that you paid.
Some international companies which are established in EU member countries will move their headquarters out of UK. In addition, UK will lose a high level foreign direct investment. Since some of EU based companies, or companies that do large amounts of business with Europe, are very likely to move their headquarters back into the EU, it will make UK gain much less tax revenues. Some people may argue that right now, EU’s economy is not promising either, especially with lots of refugees, unemployment people and Greek financial crisis, leaving EU may be a better choice. However, they failed to see that leaving EU will bring a big shock to he financial market, too. After the announcement of Brexit, the British Pounds hit thirty one year low versus American Dollars. More than one hundred billion pounds wiped off FTSE 100. UK taxpayers lost eight billion pounds on RBS. UK also lost AAA rating. Clearly it’s a nightmare for the entire financial market, and there’s no promise when the market will become stable.
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?
Countries will start wars with each other and they might end up becoming more closed of because they no longer trust other countries. A bad trade deal or even a good trade deal could negatively affect a countries foreign policy. American foreign policy is one country that has changed over the years, this fluctuation has made the United States
The value of the US dollar relevant to other currencies is a major consideration for the Federal Reserve. If they prevent large changes in the value of the dollar, firms and individuals can comfortably plan ahead to purchase or sell goods abroad.
Economic risk is another type of exchange risks companies have to consider when dealing globally. Changes in exchange rates are bound to affect the relative prices on imports and exports, and that will again affect the competitiveness of a company. An UK exporter dealing with companies in the US would not want the US$ to depreciate, because it would make the exports more expensive for the US market, thus the company will loose business.
of USD, it would need to put more weight in long futures contracts as much as they believe in by
b) If the “fourt-fiths of all the money in Great Britain to be annihilated in one night”, then the price of good and labour would go down. This would make the UK a cheaper alternative than the other nations. However, due to the competion, every other nation, like France, would also decrease their labour price, so the the UK looses its advantage and cause a economic crisis.
Interest rates and the effects of interest rates on the economy concern not only macroeconomists but consumers, savers, borrowers, and lenders. A country may react and change their interest rates, according to the prosperity of their economy. Interest rates, is the percentage usually on an annual basis that is paid by the borrower to the lender for a loan of money (Merriam-Webster). If banks decided not to use interest rates, it would be impossible for others to be able to take out loans and therefore, there would be far less spending money in the economy. With interest rates, this allows banks to take a percentage of the consumer’s money and loan it out to others, thus allowing economic growth to be possible. Interest rates also allow lenders to have a “safety net” which is necessary because there is a possibility that the borrower would be unable to pay back a loan to the bank. A nation’s interest rates can be raised or lowered and these shifts in interest rates correlate directly to aggregate demand. Aggregate demand, is the total demand for final goods and services in an economy at a given time (Business Dictionary). A nation uses interest rates for economic growth or to help prevent inflation. When economic growth is needed a nation would lower their interest rates. However, if a country is concerned about inflation, they may choose to raise their interest rates. When interest rates, raised or lowered, will have a negative or positive impact on consumers, and have a positive or negative impact on investors.
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?
There are also many consequences of adverse terms of trade internationally. High costs of debt servicing, even with a greater quantity of export are required to pay back the same amount of foreign debt. Also, falling export receipts can cause current account deficits, which could lead to increased borrowing. Adverse terms of trade reduce the country’s ability to afford much needed imports, which become more expensive. In dealing with illegal crops it may seem attractive to growers, such as cocaine in South America. The worst thing that can lead to long term depletion of resources is the incentive to export more primary products to compensate for lower export prices.
It is clear that talks about Brexit will not end quickly, and most important question is, what will happen in future. Well it could be claimed that is three different endings how this situation could end. Firstly one of the scenario is that Brexit happened and the U.K. completely leaves EU. In that case firstly British currency, the pound sterling, will fall down even more, than in the start after referendum. Also it will have consequences not only in Britain but also in the hole world, for example , some other countries, will see how Britain left European Union, and they will also will spoke to leave EU. So British leaving EU will have wide ranging repercussions on the other countries who look into EU skeptically also it will help Euro-skeptic
The foreign exchange markets allow the conversion of currencies, where it helps the firms to conduct trade more efficiently across the national boundaries. In addition, firms can shop for low cost financing in capital markets all over the world and then use the foreign exchange market to convert the foreign currency that they got into whatever currency they require. With the foreign exchange nowadays, anyone can go to other country by converting their domestic currency into the foreign currency. The foreign exchange will follow the rate of exchange according to the country's rate. But still, the foreign exchange market is actually dealing with fluctuation where sometimes it has upward and downward movement.