How Does Currency Valuation Affect Global Imports, Inflation, and Job Pay around the World - Research Proposal Example

How does currency valuation affect global imports exports, inflation, and job pay around the world? Introduction Exports and imports are very important that have a considerable impact on the consumer and the economy as a whole. The global economy of today is considered to be interlinked as consumers find product and services from every part of the world in their local markets. In this regard, the import of products by a country helps the consumers in getting more choices and also helps them to manage their budget in an efficient manner. But a high focus on imports with regard to exports by a country is not considered good as it has the potential to distort a country’s balance of trade which can have a detrimental impact on its currency. The value of currency is considered to be one of the major factors which determine a country’s economic performance. Floating exchange rate system has been considered as the major cause for currency fluctuations around the world. There are numerous technical as well as fundamental factors that are responsible for the fluctuation in one currency relative to that of the other currency. Research Question How does currency valuation affect global imports/exports, inflation, and job pay around the world? Literature Review The factors that are responsible for currency fluctuations around the world are considered to be numerous such as the supply and demand for one currency against the other, inflation outlook, economic performance, capital flows, technical support, resistance levels, and differentials in interest rates. The huge fluctuations in a nation’s currency can largely determine the economic future of that nation. The impact of gyrations of currency on an economy is considered to be far reaching. People do not usually pay a great deal of attention to exchange rate considerations because their business transactions are mostly done in their domestic currency (Christian, 2010). Exchange rate is taken into consideration by individuals only when they find themselves involved in such transactions such as import payments, foreign travel, and/or overseas remittances. There are numerous theoretical models in the international finance literature that seeks to analyze the determination of exchange rate behavior. The assumptions of fixed pricing constitute the basis on which the exchange rate models were based prior to the 1980s. The development of the floating rate of exchange was considered as a major achievement with regard to the monetary approach that determines exchange rates. The factors such as capital flows, forward premium, and volatility of capital flows are considered important with the development and liberalization of foreign exchange markets with regard to determination of exchange rates. There is a growing development in the overseas exchange markets and also there is a significant rise in the volumes that are traded in these markets. This has resulted in the micro level dynamics of overseas exchange markets being increasingly recognized in the determination of exchange rates. The access to information that is considered as private regarding liquidity or fundamentals of the foreign exchange markets by agents of the overseas exchange market is reflected in their business transactions that they undertake which is known as order flows. The evolution of the theory of microstructure came into existence to capture the dynamics that are considered to be as micro level in the overseas exchange market. The intervention of the central bank is also considered as an important variable to determine exchange rates. There has been an increase in the fluctuations of exchange rates from the year 1991 onwards. The significant fall in the value of rupee has made exports to get ahead of income. The decomposition model of earnings related to export and the import bills indicate the pivotal role that is played by exchange rate changes. Research Methodology An appropriate and effective research is required in order to determine the fundamental principles of several important positive incidents of a research work. It is highly important for a researcher to adopt an appropriate research method in a research work in order to get positive research outcome. Research methodology can be categorized into two parts, such as qualitative research methodology and quantitative research methodology. These two research methodologies have own advantages and disadvantages that need to be considered by the researchers during the application of these methodologies in the research work. Generally qualitative research methodology used to deal with inner feelings, emotions, attitudes, gestures, thoughts and behaviors of people towards the research topic. On the other hand, quantitative research objective used to deal with the analysis and evaluation of sourced and gathered data and information. This particular research work is exploratory in nature in which the feelings, opinions, thoughts, behaviors and attitudes of people can be considered as the source of data and information. On the other hand, qualitative research deals with the feelings, emotion, views and thoughts of people (Goldstein, 1986). Therefore, it can be stated that the adoption and implementation of qualitative research will be effective in this research due to the exploratory nature of the study. It is a fact that the qualitative research methodology focuses on describing the system or the process of defining and measuring several important variables. Analysis and Findings It has been widely observed that a strong domestic currency is considered as good by many people across the world as it makes it cheaper for them to travel overseas or to pay for any product that is imported from a foreign country. But a very strong currency can have a detrimental impact on a country’s underlying economy in the long run as the industries of that country could be rendered as uncompetitive leading to numerous job losses. A currency that is considered weak may result in numerous economic benefits for a country although people may not like a weak currency as it makes it costly for them to travel overseas or to purchase any product that is imported from a foreign country. The value of any country’s currency in the foreign market is an important consideration for the central bank of that country while setting its monetary policy (Peters, 2010). Therefore it can be said that the level of fluctuations in a currency affect a significant number of key economic variables such as rate of interest on mortgages, job prospects, prices of products in the local market, and also the returns on an investment portfolio. The value of a currency has a significant bearing on the economy of any country. Merchandise trade refers to a country’s imports and exports which are simply called as the international trade of a country. If a country is considered to have a weak currency, it may help the country in stimulating its exports while making imports to an extent expensive. This will result in a reduced trade deficit for the country in the long run. Domestic currency depreciation can be considered as the primary reason for the increase in exports of a country which will make the country more competitive in foreign markets. A strong currency is considered to have detrimental effects on the economy of any country because it may reduce the competitiveness of exports while making imports cheaper. This will lead to widening of the trade deficit of any country which will consequently play an important role in devaluing the currency of the country. Foreign capital is also considered as an important factor for the growth of any country. Stable currencies, dynamic economies, and strong governments can be considered as such factors that have a huge influence on the foreign capital flows of any country (Rajan, 2003). Any country, to attract foreign investment, must have a stable currency in this regard. The prospect of not having a stable currency may lead to exchange rate losses as a result of currency depreciation which may have a negative influence on the overseas investors. It is considered that there are two classifications of capital flows such as foreign direct investment and foreign portfolio investment. Foreign direct investment refers to investments by foreign nationals to acquire stakes in companies which already exist. It also may relate to the building of new facilities by foreign nationals in the overseas market. Foreign portfolio investment refers to investments by foreigners to purchase overseas securities. Foreign direct investment is considered to be an important source of funding by growing economies such as India and China, whose growth is very much dependent on the availability of such capital. The governments of countries generally prefer foreign direct investments with regard to foreign portfolio investments since the latter is considered as “hot money” which can leave any country when that country’s going gets tougher. It has been mentioned earlier that a country’s exchange rate is taken into consideration by central bank of that country while determining its monetary policy. A strong domestic currency can exert a significant impact on any country’s economy as it leads to a tighter monetary policy which can ultimately lead to higher rates of interest. In this regard, a further tightening of the monetary policy can lead to attraction of huge hot money from overseas investors who seek to have a high rate of return. This will only result in the domestic currency getting stronger (Taillard, 2012). Imports are not considered as detrimental to the economy but are regarded as a vital element of the economy. A growing and healthy economy could be considered as that economy where both the imports and exports are growing at a simultaneous pace. Inflation is considered to affect exports and imports through its influence on exchange rate. If inflation is higher in a particular country, it will lead to an interest rate which is very higher. The theory of conventional currency states that if a currency is considered to have a high inflation rate, it will depreciate against a currency which has a lower inflation rate. In practical life, it is widely found that an environment with a lower interest rate has led speculators and investors to chase the better yields that are offered by currencies with high interest rates. Conclusion Exports and imports play an important role in influencing the economy and the consumers in a direct manner. They also have a significant bearing on the value of domestic currency in a foreign exchange market which is considered to be a big determinant of the economic performance of a country. The fluctuations in currency can have various implications not only on the domestic economy but also on the global economy as a whole. Investors in general can take advantage in this regard by investing in the overseas market. The fluctuations in currency have an inherent potential risk when an individual has huge foreign exchange exposures. So in this regard it is suggested to hedge such risks through the use of available hedging tools. References Christian, S. (2010). Global Carbon Footprints: Methods and Import/Export Corrected Results from the Nordic Countries in Global Carbon Footprint Studies. Copenhagen: Nordic Council of Ministers. Goldstein, M. (1986). The Global Effects of Fund-Supported Adjustment Programs. Washington: International Monetary Fund. Peters, M. (2010). What the 2008/2009 World Economic Crisis Means for Global Agricultural Trade. Darby: DIANE Publishing. Rajan, R. (2003). Sustaining Competitiveness in the New Global Economy: The Experience of Singapore. Massachusetts: Edward Elgar Publishing. Taillard, M. (2012). 101 Things Everyone Needs to Know about the Global Economy: The Guide to Understanding International Finance, World Markets, and How They Can Affect Your Financial Future. New York: Adams Media. Read More