The paper “ Exchange Rates - a Link between the Prices of Goods and Services Produced in All Trading Nations” is a convincing variant of the assignment on finance & accounting. The critical thing about exchange rates is that they provide a direct link between the prices of goods and services produced in all trading nations of the world” . Globalization has multiple characteristics. Undoubtedly, one of them is the growing exchange of goods and services across national borders. This means that capital is becoming internationally mobile, and countries are competing against each other with reference to their share of the business environment.
The exchange practices are controlled by the exchange rate, which is the price of one currency in terms of another (World Bank, 2007), which affects the manner prices of goods and services vary on a day to day basis. Brauer (2003) studied exchange rates based on two questions: (1) whether countries set the prices of traded goods based solely on specific costs of production, and (2) whether the conditions in the pertinent target market or the global market also influence the setting of prices.
The concept here is very important because is frequently observed on one hand that shocks arise due to shifts in nominal exchange rates or costs of production between countries, and on the other hand, there is a presumed law of one price that is expected to hold for identical goods around the world. Nevertheless, some adjustments have to be made as a result of imperfect homogeneity of goods (Brauer, 2003). Several factors influence the exchange rate equilibrium. The equilibrium exchange rate will shift over as demand and supply schedules change (Madura, 2009).
The aspects that may cause currency demand and supply schedules to change are highlighted briefly in this paper. They include percentage change in the spot rate, change in the differential between the United States interest rate and a foreign country’ s interest rate, change in government controls, and change in expectations of future exchange rates. Changes in relative inflation rates can influence international activity, which impacts the demand for and supply of currencies and thus influences exchange rates.
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