The Notion of Exchange Rate - Essay Example

1. a) Explain what is meant by an exchange rate? (5 Marks) An exchange rate can be described as the process of changing the price of a given currency into the price of another different currency. Exchange rate is usually dependent on its demand, supply and price in the market. Basically, it implies that it is the rate at which a given currency’s price is exchanged into the currency of the other nation. Exchange rates therefore directly affect businesses since changes in prices can have an impact on the import and export of commodities resulting in increments and reductions in the cost of raw materials that are imported. In addition, exchange rates can make it quite difficult or easier for foreign competition to penetrate the local markets. Exchange rates can also have a direct impact on the losses and profits in a business. (b) Analyse why governments are concerned about the rate of exchange between its currency and the currencies of other nations? 20 Marks) Fluctuations in exchange rates can negatively or positively affect both exports and imports. Thus the cost of raw materials that are imported could be more or less on the basis of the exchange rate between two trading nations which may lead to either hard or easy export. When more money is used in producing goods which are exported to a different nation with a less currency rate, it leads to those goods being less priced leading to the business having losses. Because of these changes in exchange rates when importing or exporting, the government gets interested in the exchange rates between currencies of other countries. Thus whenever goods are produced in a different nation, the government concentrates on selling of those goods so as to get more money from other nations from its exports. Production of such goods is usually done at low prices making use of the currency with the country having low currency rate and then profits are gotten by selling the produce in a country having a high currency rate. Such conversion of currencies in the production as well as selling of a similar product is aimed at earning profit. In addition, the government is dependent on some controls that control the exchange rate and these controls are long-term, medium-term and short-term. For instance, in short-term, the major banks like Central Bank operate with foreign markets by either beginning to buy or sell its currency. The interest rate on currency on the medium term can be regulated to make profit only. On the other hand, on the long-term, management of the economy is in such a manner that it results in a direct increase in the demand and value of the products manufactured in the nation (imports) with the demand for foreign currency also increasing. For a country such as China, the value of its currency is lower in comparison to such nations as the UK; something that makes Chinese export products profitable since they can produce goods at prices that are much lower and export to other foreign nations. In this manner, it raises the import of commodities from China with the difference in currency providing profit to both nations. Various options can also be followed by the government in managing the exchange rate for instance the soft peg or hard pegs systems that provide the government an option to sustain the degree of exchange rate even though in the managed float system, the government can meddle in markets so as to decrease/increase the exchange rate. 2. a) Explain what is meant by cultural differences in the context of international business (5 Marks) The differences that exist in cultures are due to the fact that various people have various beliefs, values and attitudes. Thus, in case of international business, differences in cultures may result in issues in working as well as using practices of a given corporation. Typically, the workers may feel uncomfortable due to the various working habits as well as behaviour of foreign associates in the company. Because of these cultural variations, employees can in addition be faced by language barriers due to the failure of understanding foreign languages of other nations. Tradition and religion are other factors that can be an obstacle for businesses seeking to grow in international business since some religious options can halt the business or not permit some products. The other factor that can affect companies and employees involved in international business is geographical differences. (b) Analyse the social and cultural challenges likely to be faced by foreign business wishing to operate in China? The obstacles encountered by foreign business people in China are on the basis of cultural and social challenges which include cultural and language barrier. This therefore can be challenging especially for the workers to interact with Chinese due to the culture and language difference. It may also occur that the Chinese do not display any interest in the values of goods that the corporation is attempting to manufacture, so there can be a variation in behaviour and interest on the basis of cultural differences. The process of establishing a company in China is longer and consists of several steps which also make it hard on the basis of rules as well as the social transformations from one nation to another. 3. a) Explain what is meant by the legal Environment of business. A business’s legal environment implies that the business system is able to support as well as control behaviour and come up with law enforcement regulations so that it can focus on providing solutions for any complains or issues. This differs from one nation to another and adheres to the common law. In addition, it comprises the civil law that assists in dispensation of both the legal as well as customer system to adhere to the day to day experience within the business environment even though the government intervention on legal system differs from period to period. (b) Discuss the aspects of the legal environment which a business should investigate before entering a market abroad. (20 Marks) Prior to entering a foreign market, it is essential to research or look on some laws that can likely affect international business. These regulations comprise National laws that affect cross-border local business and cross-border activities. In addition, they must research about the legal ramifications for evading any effect on daily operations. Thus, such legal regulations may also have an effect on competitive edge with other businesses. Consequently, it is crucial the roles that a business manager requires to be aware for effective operation of the international business. These roles for instance are like beginning a business, signing new contracts, management of local workers’ jobs for the new business, business closure as well as the regulations that accompany all these roles. Typically, the investigations ought to be done on the strategy that comprises the liability and safety of the product, market place behaviour, and product origin in addition to any legal regulations that may apply. Therefore, business people must find out about the intellectual property rights like product copyrights, secrets, patents, trademarks which may be an issue in some impoverished nations because they are not able to offer robust legal protection for such rights. In addition, they must also be knowledgeable about how the legal services handle the problems together with how rules and regulations are applied in such countries. 4. a) Explain what is meant by comparative advantage? (5 Marks) Comparative advantage basically implies having more gains for a nation or company due to enhanced production technology. Thus, one nation may be having comparative advantage over the other for instance if it has low opportunity cost. For instance: Hours of work necessary to produce one unit Country Cloth Wine England 100 120 Portugal 90 80 In the illustration above Portugal has complete advantage for cloth, however England has comparative advantage. (b) Discuss the extent to which comparative advantage can explain International trade patterns. (20 Marks) Comparative advantage is actually one of the most critical concepts as far as international trade theory is concerned; however, there are some misconceptions as well. The notion of comparative advantage is very basic and it clarifies that if one nation can produce some products for a price that is low and another nation can produce goods for lesser price, then both nations must trade their goods so as to earn a profit. In order to raise the total output of the world, it is essential that the resources are well used. Thus, various as well as special resources must be availed to nations producing cheaper products something that will also maximize the profit in addition to enhancing the international trade. In addition, the comparative advantage can also help in explaining the trade patterns of a nation by demonstrating that the variation in technology can impact the prices of goods in various nations. Thus, if one nation has complete advantage as well as has more productivity then the employees also have more salaries. Normally Inter-industry trade is done for goods which belong to various industries, for instance, agricultural produce and equipments. This kind of trade is also dependent on the comparative advantage of the other nations. However, intra-industry trade occurs for products that belong to a single industry something that assists in making numerous various kinds of goods for a single industry and facilitates the nation to raise the profit by use of the comparative advantage for unique products only. Nevertheless, this can negatively affect other industries and thus a more enhanced theory is required for intra-industry trade. 4(a) Explain what is meant by an import tariff? (5 Marks) This refers to the amount of tax normally put on the goods that are imported so that their sale can be restricted to safeguard the local companies. For instance; if rice is exported to UK from India, then the company must pay tax to avoid becoming cheap and overtake the domestic rice companies. (b) Discuss critically various reasons for restricting trade (20 Marks) Numerous reasons exist as to why there is restriction of trade in various nations. One of the chief reasons is that government gets money by levying tax on exports and imports. The other purpose is that restrictions are enacted to save the domestic industries from incurring losses as it can affect the locally available jobs. The third motive is that restriction can put by the government to some goods which can possibly affect the public safety and health. For instance, the US government in 2001 restricted animal trade due to diseases. Eventually the government can also limit trade for political purposes. Thus, for instance, the government of one nation can restrict products from another nation to demonstrate that they are not in any way sponsoring political movements in that nation. Apart from the above 4 major reasons ,there are numerous other motives that can lead to trade restriction between two given nations, which comprise of product quality, issues to do with human rights, employment and economic situation etc. Read More