Exchange rate and exchange: how money affects trade - Term Paper Example

This paper seeks to identify ways in which money affects trade based on exchange rates and exchange. When a nation demands products from another nation, they first enter into a different market where they buy the nation’s currency. For instance, if a merchandise buyer for an electronics’ firm wanted to purchase Sony products for their retail, they would not send dollars directly to the Sony Company. They would first have to enter the foreign exchange market and buy Yen. The Yen would then be used to conduct business with Sony Company.

Changes in the supply and demand of commodities lead to changes in prices of such commodities. Similarly, changes in supply and demand for foreign currency also lead to changes in prices of currency. Consequently, money price changes with changes in demand for the foreign currency changes. The price of foreign currency based on the US dollars is referred to as the foreign exchange rate. It helps to determine the amount of American dollars it would cost to purchase some unit of foreign currency (Kegley and Blanton, 364).

Money tends to work in different ways as it serves different purposes. Money has to be widely accepted in order for the people who earn it to be able to use it in buying commodities from others. For people being willing to invest their wealth in the form of a particular currency, it must store the value. Money should also act as an accepted standard of deferred payment for people to be guaranteed of its future purchasing power. The decisions made by nations’ central banks to change their money supply aiming at managing their national economies, control inflations, change the circulation of money as well as raising or lowering interest rates are referred to as monetary policies.

Movement in a country’s exchange rate occurs partly when a change develops in its people’s assessment of their