Essays on Exchange Rates - a Link between the Prices of Goods and Services Produced in All Trading Nations Assignment

Download full paperFile format: .doc, available for editing

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.

References

Kandil, M. (2000) The Asymmetric Effects of Exchange Rate Fluctuations: Theory and Evidence from Developing Countries, Issues 2000-2184, International Monetary Fund, New York.

World Bank (2007) World Development Indicators 2007 (11th edition), World Bank Publications, New York.

Brauer, H. (2003) The Real Exchange Rate and Prices of Traded Goods in OECD Countries, Springer, New York.

Krugman, P. R.(2004) International economics: theory and policy (6th edition), Online, http://books.google.co.ke/books?id=L5DaCeXtNq0C&dq=floating+exchange+rate&client=firefox-a&source=gbs_navlinks_s (accessed 3 May 2010).

Odedokun, M.O. (1996) Monetary model of black market exchange rate determination: evidence from African countries, Journal of Economic Studies, 23(4): 31-49.

Kenen, P.B. (2000) Fixed versus floating exchange rates, Cato Journal, 20(1): 109-113.

Reserve Bank of Australia (2010). The Exchange Rate and the Reserve Bank’s Role in the Foreign Exchange Market, http://www.rba.gov.au/mkt-operations/foreign-exchg-mkt.html (accessed 3 May 2010).

Mussa, M. (2000) Exchange rate regimes in an increasingly integrated world economy, International Monetary Fund, New York.

HM Treasury 2005, The exchange rate and macroeconomic adjustment. EMU study.

Madura J. (2009) International financial management (Abridged edition), Cengage Learning, New York.

Bank for International Settlements (2009) Australia's experience with capital flows under difficult exchange rate regimes, http://www.bis.org/publ/cgfs33rba.pdf (accessed 6th May 2010).

Reserve Bank of Australia (2010) The Exchange Rate and the Reserve Bank’s Role in the Foreign Exchange Market, http://www.rba.gov.au/mkt-operations/foreign-exchg-mkt.html (accessed 6th May 2010).

Edison, H & Vitek, F. (2009) Australia and New Zealand Exchange Rates: A Quantitative Assessment, IMF Working Paper WP/09/7, http://www.imf.org/external/pubs/ft/wp/2009/wp0907.pdf (accessed 6th May 2010).

Download full paperFile format: .doc, available for editing
Contact Us