The Manner in Which Exchange Rate Volatility Affects the Volume of Trade in the Economy of Oman - Research Proposal Example

Section One Table of Contents Introduction 2 Literature Review 3 Purpose 6 Scope 6 Research Question 6 Scope 7 Introduction The economic crisis impacted the world economies differently and resulted in changing the trade patterns between countries. Since, recession had translated into lower rate of employment most of the economies thereby look towards increase exports to sustain their economy and to improve their accounts balance deficits. This has increased the outlook for the policy makers as they look forward to understand the manner in which exchange rate movements have an impact on the performance. It is true that depreciation of the home country currency makes export cheaper and import becomes expensive. The fact that most economies are vertically integrated and require both imported goods and have to export goods so volatility in the price of the currency has special relevance. Since, the inception of the floating exchange rate in 1973, economies all around the world have experienced the effects of volatility in currency prices which has thereby impacted the exchange rate and the volume of trade taking place in the economy. Despite it no consensus has been reached regarding the manner in which exchange rate volatility has an impact on the trade that the economy witnesses (Bahmani-Oskooee and Hegerty, 2007). Different studies don’t highlight a clear cut relationship between volatility in exchange rate and volume of trade that takes place in an economy. Despite, the lack of consensus on the effect of trade and exchange rate volatility in Oman the impact is unknown. The aim of the study is thereby to develop a relationship between exchange rate volatility and the volume of trade that takes place in Oman so that a relationship between them can be established. To find out the relationship the research firstly looks into the different previous research were carried out find out the relationship between exchange rate volatility and the volume of trade. This is than carried forward by conducting a research which looks towards determining the amount of trade which has taken both as export and import from Oman over the last quarter or 25 years and the exchange rate for the same is noted. This will help to develop the robustness for establishing the long term relation between exchange rate volatility and the volume of trade. Then using the econometric analysis the relationship between exchange rate volatility and the volume of trade will be identified and will help to understand the manner in which trade gets impacted due to exchange rate volatility. Literature Review The exchange rate volatility and trade has given to the development of different models and theories which state that volatility may impact the volume of trade either positively or negatively depending on different factors and their assumption and role towards the degree of risk that the factors presents (McKenzie, 2003). One of the common reason which looks to highlight the negative relation between exchange rate volatility and the volume of trade is the transaction cost (Hooper & Kohlagen, 2005). The study shows that the cost of converting one currency into another country and the risk that is associated with the conversion of currency results in having a negative impact and has an impact on the volume of trade. The constructed model to test both the importer and exporter attitude towards exchange rate volatility suggest that the volume of trade automatically reduces as risk averse people reduce the volume of trade due to transaction cost which the process involves (Hooper & Kohlagen, 2005). Another study by De Grauwe (2005), states that a positive or negative impact on trade is depends on the risk aversion strategy that the firm looks to use. In situation when the exporters are slightly risk averse they will produce less quantity of goods because of high exchange rate which will thereby reduce the marginal utility that the exporter gets. In case the exporter has a high risk aversion then the situation becomes worse as it would have a negative impact on the overall performance of the organization and then the economy (Dellas and Zilberfarb, 2003). Another study conducted by Broll and Eckwert, (2004), states that the two opposing effect which has a role in determining the impact of volatility on trade is the substitution effect, where uncertainty has a negative impact on trade and income effect where increase in international trade takes place so that the expected utility maximizes. In case the organization or people taking different decisions are risk averse makes the income effect dominate the substitution effect which thereby will reduce the volume of international trade that takes place. This has been backed by another study which shows that hedging against future exchange rate movements helps to reduce the volatility of exchange rate movement and helps to deal with the level of risk that international trade presents (Obstfeld and Rogoff, 2001). This has been further substantiated by another study which shows that hedging helps to reduce the impact of exchange rate volatility but to a limited extent as the cost and limitations makes it difficult for the firms to find out the accurate volume and timing when such an international transaction will take place (Caporale and Doroodian, 2004). The risk and manner in which trade takes place between economies further gets affected as economies look to transact in currency like dollar and if both the country don’t have dollar as their local currency than it further increases the cost which thereby has a negative impact on the volume of trade (Carter & Pick, 2004). In a similar manner a research carried out by Coric and Pugh (2008) where meta-analysis is used showed that 33 studies revealed that a negative relationship is established between exchange rate movements and volume of trade whereas 25 studies showed that this was not true. Instead 8 of the studies highlighted that it helps to enhance the volume of trade that takes place between nations. This has been further confirmed by another study which shows that exchange rate volatility results in having a positive impact on certain products whereas a negative impact on some other product (Rose and Stanley, 2005). The same has been examined in case of US where the analysis revealed that devaluation of the US currency had a negative impact on the volume of trade with 13 partners but had a positive impact on the trade with 37 partners showing that different factors and situations plays a different role and makes the entire outcome to be entirely different (Chiu Lee and Sun, 2010). The overall impact through the different model thereby shows different results and the manner in which different factors have a role in determining the manner in which the volume of trade gets affected due to volatility in the exchange rate. This is still an area of research which will require more inputs and developments from different areas and directions so that a better understanding regarding the manner in which trade gets affected due to changes in exchange rate can be established. Purpose The manner in which trade in Oman has been affected due to the fluctuations which has been continuously being witnessed in the exchange rate is an area for policy makers to understand. Determining the different variables and the manner in which volume of trade gets affected due to those factors will help to develop the required framework which will look into the different factors and the role they have in bringing a change in the attitude of the exporters and importers. The purpose of the study is thereby to develop a relationship between exchange rate volatility and the volume of trade that takes place in Oman so that a relationship between them can be established. This will help to understand the different positive and negative variables which have an impact on the volume of trade that takes place due to exchange rate fluctuations. Scope The scope of the research is thereby to limited to Oman where the research looks to evaluate the amount of trade which has taken both as export and import from Oman over the last quarter or 25 years and the exchange rate for the same is noted. Using the different relationship model this will thereby help to understand the relationship but is largely limited to Oman and might not be true for other countries. Research Question The purpose of the research which is to develop a relationship between exchange rate volatility and the volume of trade that takes place in Oman in relation to change in exchange rate gives rise to the following questions which will be answered through the research which is to be carried out RQ1: The manner in which the exchange rate volatility has affected the macro economic variables and thereby the macroeconomic performance of Oman? RQ2: Determining the extent to which exchange rate volatility had affected the macroenomic performance or volume of international trade in Oman? Scope The research question thereby looks to formulate a hypothesis and helps to find out the manner in which the volume of trade gets affected due to changes in the value of currency and will thereby help to find out the different relationship and variables which will help to determine the relationship and will improve the overall validity of the research which is carried out. Section Two Table of Contents Research Methodology 9 Sampling Strategy 10 Data Collection 11 Data Analysis 12 Reliability 13 Access 13 Gantt chart 14 References 15 Research Methodology The research looks to investigate and find out the manner in which exchange rate volatility has an impact on the volume of trade which is taking place within the economy of Oman. This will help to find out the different variables and the impact it has on the overall performance of the economy. To ensure that the research provides the best results the research looks to use both the secondary and primary research. The secondary research looks to use the past research and findings through the model of literature review to understand the manner in which different factors and economic condition has led towards volatility in exchange rate and thereby has helped to establish the relationship between exchange rate and change in trade. The primary research methodology looks to gather relevant and actual information about the past performance of Oman in relation to the changes in exchange rate (Gotur, 2005). This will thereby help to develop the framework through which better understanding of the variables can be identified Using the different econometric model and regression equation a relationship will be established between the different variables and factors which results in changes in trade due to changes in exchange rate so that the different variables and their role can be understood. This will use the quantitative method as the research will be based on gathering the past data on Oman trade. Thus, the methodology will be aimed at improving the overall relationship that exists between the different variables. Sampling Strategy The sampling strategy which has been adopted is one where it proposes to use quantitative methods so that the different underlying variables which results in changes in trade due to exchange rate fluctuation can be identified. The sampling strategy thereby looks to gather quantitative data regarding the trade which has taken place and looks at examining the different factors like foreign direct investment, GDP, growth rate (GRATE) and trade openness (OPENN). The sampling strategy adopted for the research will be gathering the annual observations and the data about the volume of trade from different reliable government sources which will be secondary. The sample will look to cover a period of 25 years i.e. from 1985 to 2010 providing a total of 25 observations. The different variables used in the study are quantitative in nature. Further the sampling method also looks towards identifying the different variables which will be used in the research. The different variables to be used has been identified as foreign direct investment, GDP, growth rate (GRATE) and trade openness (OPENN) are being determined as dependent variables and the exchange rate volatility is being considered as an independent variable In addition to it there are other factors which also have an influence on the volume of trade which gets affected due to exchange rate volatility has been kept out of purview of the research as it would otherwise complicate the research and would make it difficult to find out the actual relationship. Data Collection Since, the study proposes to be carried out on secondary data and uses the quantitative method to identify the manner in which exchange rate volatility has an impact on the volume of trade so data will be gathered from the different government websites. The research will be gathering the annual observations and the data about the volume of trade from different reliable government sources which will be secondary. The sample will look to cover a period of 25 years i.e. from 1985 to 2010 providing a total of 25 observations. The different variables used in the study are quantitative in nature. Further the sampling method also looks towards identifying the different variables which will be used in the research. The process of data collection will further use the past research and findings so that the different regression which is carried out over the data which has been collected can be better analyzed. The data collection method also emphasis on collecting important information relating to foreign direct investment, GDP, growth rate (GRATE) and trade openness through reliable sources so that the impact it has on the overall performance of trade can be identified. In addition to it the data collection method will also look towards understanding the attitude of both the exporters and importers by relating the study to past studies. This will help to establish a better relationship and will help to understand the manner different variables have a role in bringing a change in the perception of importers and exporters which thereby has an impact on the overall relationship Data Analysis The data which has been collected will be analyzed through the development of a regression equation which will throw light on the different relationship which is present and will help to identify the degree of dependence and relationship which exist between them. It will expected that the result will help to determine the manner in which exchange rate volatility has a positive impact on the performance of GDP, growth rate and openness in trade. This will help to ensure that a positive coefficient is developed which will thereby help to ensure the validity of the research Volatile exchange rate should have a positive impact on GDP as exporters and importers from other country will look to capitalize on the situation and will thy to increase their marginal utility by taking maximum benefit which will thereby have a positive impact on the demand for goods and services. In case GDP highlights a positive coefficient and relationship the same will be depicted by the growth rate. This will result in favorable impact on the openness to trade as increase in export would mean that better relationship has to be developed which will foster an opportunity to increase the volume of trade. The research also looks towards believing that a negative coefficient and relationship will be seen in case of foreign direct investment as it will look towards a reduction of investment as fluctuations in the exchange rate especially if it is very volatile will increase the risk and will thereby reduce the amount of foreign direct investment The research will thereby helps to find out the relationship which is present between the volume of trade and the fluctuation in the exchange rate and will thereby help to understand the different variables which has an impact on the overall development of Oman. This will thereby determine the different variables and the manner in which it has an impact on the performance of the economy. Reliability The findings of the research can be relied on as the research proposes the use of a simple regression equation which helps to determine the relationship between the different variables which have been used for the research. Further, since the data which is used for the research has been gathered from different reliable sources belonging to the government it will thereby increase the relevance of the study. Further, the quantitative data which is used will help to generate the same result if the regression analysis is run ensures that the research will provide the same result. This thereby ensures that the research can be tested and verified for different variables and data and will increase the overall reliability of the research and the different findings which the result looks to present. Access The research will have access to different decisions and the manner in which the performance of Oman with regard to the volume of foreign trade is determined. This will thereby help to develop a better relationship and will provide the different useful variables which have an impact on the performance and ensure that the importer and exporter attitude can be understood based on it (Berman, Martin and Mayer, 2009). This will help the policy makers to understand the different areas and aspect where they need to focus on and will thereby help to maximize the use of result in different decisions making. Gantt chart The research will also help to develop a Gantt chart which will determine the complete timetable for carrying out the research and is as 1st Month 2nd Month 3rd Month 4th Month 5th Month 6th Month 7th Month 8th Month Collection of Secondary Data Collection of data Analysis of data Report writing and presentation The above chart highlights the manner in which the entire research will be carried out and helps to identify the manner in which the final relationship will be determined. This will thereby ensure that the research to find out the relationship which exist between exchange rate volatility and volume of trade can be established and will help to find out the manner different variables has a role in decision making by the importers and exporters. References Broll, U. and Eckwert, B. 2004. Exchange rate volatility and international trade, Southern Economic Journal, 66 (1), p. 49-54 Bahmani-Oskooee, M. and Hegerty S. W. 2007. Exchange rate volatility and trade flows: a review article, Journal of Economic Studies, 34 (3), pp. 211-255 Berman, N. Martin, P. and Mayer T. 2009. How do different exporters react to exchange rate changes? Theory, empirics and aggregate implications, CEPR Discussion Paper 7493 Caporale, T. and Doroodian, K. 2004. Exchange rate variability and the flow of international trade, Economic Letters, 46, 49–54 Carter, C.A. and Pick, D.H. 2004. The J-curve effect and the US agricultural trade balance, American Journal of Agricultural Economics, 71, p. 712-720 Coric, B. and Pugh G. 2008. The effects of exchange rate variability on international trade: a meta-regression analysis”, Applied Economics, p. 1-14 Chiu Y-B., Lee C.-C. and Sun C.-H. 2010. The US trade imbalance and real exchange rate: an application of the heterogeneous panel cointegration method, Economic Modelling, 27, p. 705- 716. De Grauwe, P. 2005. Exchange rate variability and slowdown in growth of international trade, IMF Staff Papers, 35, 63–84. Dellas, H. and Zilberfarb B.-Z. 2003. Real exchange rate volatility and international trade: a reexamination of the theory. Southern Economic Journal, 59 (4), 641-647 Gotur, P. 2005. The effect of exchange rate volatility on trade: some further evidence, IMF Staff Papers, 32, 475–521 Hooper, P. and Kohlhagen, S. W. 2005. The effect of exchange rate uncertainty on the price and volume of international trade, Journal of International Economics, 8, 483–511 McKenzie, M. D. 2003. The impact of exchange rate volatility on international trade flows, Journal of Economic Surveys, 13, 71–106 Obstfeld, M.and Rogoff, Kenneth S. 2001. Risk and exchange rates, NBE,R working paper 6694 Rose, A. K. and Stanley, T. D. 2005. A meta-analysis of the effect of common currencies on international trade, Journal of Economic Surveys, 19, pp. 347–66 Read More