Factors Influencing Exchange Rates, Trade Protection Merits and Mechanism Used for Trade Protection - Essay Example

International Trade xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Factors influencing exchange rates, weak currency, Trade Protection Merits and Mechanism Used For Trade Protection xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Name xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Institution xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Lecturer xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Date Exchange rates are a term used in finance. Different states have currencies with distinct values. Generally, due to the international trade, money must be exchanged. This is done depending on the worth of one currency compared to the other. Money can be exchanged in two distinct forms. The first one is instant exchange rate where money is exchanged immediately. Secondly, there is forward exchange where the money is not instantly exchanged but it is to be done later. Classification of money exchange rates is further done into two categories namely: set and floating rates. In set rates, a state decides the value of its currency in comparison to the other currencies from different states according to some universal regulations. On the other hand, under floating rates the worth of a currency is determined by demand and supply forces. There are various factors that influence exchange rates. To commence with, capital mobility has greatly influenced. When a nation borrows money from another in form of loan, it gets it in form of foreign currency. The lending nation’s currency (Bowen 1998) gains demand. If the lending nation does this severally to different countries, the demand rises further. This in deed leads to increment to its value as compared to the other states that have been borrowing hence the rate of exchange consequently shoots up. On the same note, a country’s currency value can be advanced by allowing many people to invest in the country. This can be facilitated by increasing the amount of interest on the principal amount of money invested (Leontief 1953). The country can allow people to buy shares and other securities and give them good returns. This is because the money of the country where investment is being done will be highly demanded hence the increase in its value. In addition, monetary policy has caused change in exchange rates. When prices change of certain gods and services in a certain nation, this lends to change in the rate of exchange of its currency. If the price of commodities and services provided by a country go up, then the amount that is exported decreases. This means there will be less demand of the nation’s currency hence decline in its value. Price decline will definitely attract more buyers from other countries; hence increase in its currency value due to more exports (Krugman 1988). When there is speculation of an expectation of future currency fluctuation, demand of the currency changes. A rumor might be heard that there is an expectation for a currency to rise in the near future. This will ignite people to buy more of the currency before its value increases. Speculations many a times cause an immediate rise in price of a currency due to the abrupt demand increase. These speculations add advantage to the country’s currency because the expected rise in its currency does not automatically change, it might be followed by decline hence loss to those who expected to sell it. To add on, exchange rates are influenced by the amount of goods a country imports and exports. In times of high importation, the value of the currency goes down. This is because a lot of the currency is spent as payments are being made. If it exports more commodities and services, this is good since it increases the value of the currency. A country can decide to devalue its currency to attract another country to buy its goods. In so doing it would mean that, it will let the value of its money value to go down that it used to before. This makes the other country to be in a position to purchase more goods from it. Devaluation in this case is of great significance due to the following advantages. The country that has devalued its currency encourages more exportation of products and services. This is because the selling price has gone down. This will consequently cause demand decrease for foreign imports of commodities and services(Krugman 1988). To the country that the currency has been devalued, the prices for the other country become more expensive. Devaluation results into more exportation of domestic goods and services. This means the domestic supply rises. On the other hand, foreign importations delivery decreases. Political climate has always affected the value of the currency. If it is stable people don’t sell out their currencies frequently but greatly, if the value is high. Instability in political climate means there is no enough security in the country. The people of the country tend to sell out their currencies and in so doing the worth of the money goes down consequently. Sometimes, there can be variation in competition for goods in different countries. This competition can be stiff and lead to a high demand of products and services from a specific country. This cause higher supply from that country hence its currency value incline. As this happens, the other countries suffer because they are in need of goods and services they cannot produce and they have to import. Due to the above factors that influence the rate of change, a currency can grow weak or strong. This is subject to how much exportation and importation transactions a country can carry. A currency weakens in its value due to more importations, political instability among other reasons as mentioned in the above discussion. Weak currency allows creation of more jobs in the country that is selling out goods and services. Foreigners tend to buy more goods and services from this country since their prices are relatively low and more affordable. In order for this country to meet the demand from outside consumers, it has to employ more people to produce the needed goods and services. This improves the standards of living of the citizens since there are increased employment opportunities. Weaker currency discourages other nations from exporting their goods to the country with the weaker currency. In so doing, the country’s weaker currency with time gains value due to the ability to sellout products and services. In fact, since the nation’s money is of less value, there is limited or no importation of substances and services for their cost is expensive. This encourages domestic trade growth and expansion as citizens rely on the available one. As the nation majors on exportation, they tend to produce a lot of exports of high quality. This mighty end up creating more market opportunities from many other countries after they get information. As they venture into the new markets, they can interact and create good business transactions. This will help the country to get new products and services they do not produce at cheaper prices. The country might realize some needs that have never been met before hence creating yet new markets. Trade protectionism is term used mainly in international trade. A country will always strive to ensure that its internal business transactions are conducted without any external interference from other countries. This interference may result from increased importation and information leakage to other countries concerning the goods and services they produce. Trade protection has many advantages to each and every country. A country can impose some restrictions to limit the amount of goods and services that are imported to rectify a deficit that needs to be paid. This deficit comes as a result of less exportation than the import transactions done by a country within certain duration of time (Frances 1989). This shows that the cash or money that is given to other countries is less as compared to the amount being received. Protectionism is needed in order to protect new and upcoming industries. If this is not done, domestic industries can be competed by external industries. The external ones might be established as compared to the infant internal ones hence the competition can cause them to collapse immediately. To add on, protection enhances rapid growth and development in a country. This can only be attained by allowing different industries to be established, and manufacture various goods and offer a wide range of services. This leads to another merit: economic stability (Reisman & Fuh 1989). This is a state where a country has access to variety of services and the needs of the nation can be met with the goods it has without necessarily buying from other countries. Each country has the most valued industries it cannot do without. If it has some restrictions, it will easily protect them and later boost its economic growth rate. These key industries are of great significance for they give rise to other complementary ones. In deed, this also assists the industries which are declining in its operations. A textile industry may face great competition from external industries. To promote its growth, restrictions should be put to limit the amount of clothes being imported. As international trade is being conducted, a country can produce goods of low quality. In case there are no restrictions in trade, the country can dump them into another country. This can be facilitated by introducing low prices to the receiving country, more so if the same products and services are produced in the same country (Samuelson 2001). Many are the times; the receiving country may find out that some of them are harmful such as clinical drugs. Failure to protect country’s trade can cause unemployment. This may be due to some industries collapsing after they are out competed. It is automatic that if there is no protection, a state faces instability in its economy. As the industries collapse many people are stopped from working and even as the population grows many people find no or limited employment vacancies. Many live under stress while other result into immoral deeds such as theft. Where industries and trade is protected, there is usually opening for more new jobs. Protection of trade enhances consisted supply of goods and services. This arises from the fact that a country will continually produce goods without being affected by the other country. In times of external war, a country will not be affected in its production but it will manufacture what is needed by its citizens without relying on foreign states. Protection trade policy helps a nation to have limits on the amount of money that can be invested in other countries. By so doing, people are encouraged to invest in their country. The money invested is used for economic growth and development. Where there is no protection of trade, most of the capital that can be used is invested in other countries, thus benefiting those countries at the expensive of the country where investors come from. A country that depends on international trade in an amplified way may be forced to implement political and business policies of the other country. This results into political blackmailing. The country will therefore basically rely on those set policies which will affect their mode of living and have little say for they will be ruled by the other nation. To curb this, a country has to protect her trade. There are several ways used to protect imports in order to implement trade protection policy. Government can decide to introduce tariffs (Frank 2007). These are taxes charged on imports. These tariffs usually cause an increase in the price on the imports. With so doing, people are discouraged from importing commodities and services. Even the local traders are motivated to buy and sell local goods and services at cheap prices for they cannot afford to buy the imports at higher prices and sell at low prices (Jones 1961). The tariffs may be specified or unstipulated. Specified tariffs normally are stated and known for certain goods or services. Unspecified tariffs are calculated as a percentage of the total amount of products imported. Tariffs enhance the demand of internally manufactured goods and services. A government can choose to give subsidies to local imports. It can give loans and charge less interest rates, or lessen the amount of tax charged on the goods some industries produce to encourage more exportation (McKenzie 1954). This aids the industries to reduce their selling prices hence attracted more international buyers. In addition, importers tend to shy off because the local sellers have set minimal selling prices to similar goods and services as compared to their which is higher. A government can monitor the rate at which currencies are being exchanged and put some control measures. This limits the amount spend on imports. If there are limited amount of imports, the internal traders are widely protected from stiff competition that can be introduced by foreigners. It can also discourage foreign exchanging by ensuring the buying price of a foreign currency is made low with respect to the domestic currency. The other mechanism is importation bans. The government can prohibit external entry of products and services for some reasons. In addition, the state government can introduce complicated protocols and processes to be followed as people purchase goods from other nations. This discourages since the people interested will be made to take long period of time before they acquire them hence ensuring there is little inflow from other states. A government can exercise some governmental restrictions. It can choose not to disclose any information to its citizens concerning any goods that they can buy cheaply. On the other hand, there are some goods and services that are produced by it only. To ensure that there is no other country to outdo it or start to produce, it can keep any information that will assist to the other country to venture into the same production line. This will help the internal industries to produce the goods and in return sell them with no competition from other states. The government can still state the total number of goods to be bought from other countries for a certain interval of time (Trefler 1995). This is known as a quota. It does this by licensing the people to buy goods from external market. This ensures there is a certain amount of goods that have been imported. References Jones,W, 1961, Comparative Advantage and the Theory of Tariffs, The Review of Economic Studies vol 28, pp161–175 . McKenzie, W, 1954, Specialization and Efficiency in World Production, The Review of Economic Studies, Vol 21, pp 165–180 . Samuelson, P 2001, A Ricardo-Sraffa Paradigm Comparing the Gains from Trade in Inputs and Finished Goods, Journal of Economic Literature,Vol 39, pp 1204–1214. Reisman and Fuh C, 1989, Seeking Out Profitable Countertrade Opportunities: A Proactive Approach, Industrial Marketing Management Vol 18, pp 65-71.  Frances S, 1989, Recent Theories of International Trade: Some Implications for the South, Monopolistic, Oxford University Press, pp,84-108. Krugman, P, 1988, International Economics: Theory and Policy, Glenview: Scott, Foresman.  Bowen, H, et al, 1998, Applied International Trade Analysis, London: Macmillan Press, . Leontief, W, 1953, Domestic Production and Foreign Trade: The American Capital Position Re-examined, Proceedings American Philosophical Society, Vol 97, pp 332–349. Trefler, D, 1995, The Case of Missing Trade and Other HOV Mysteries, The American Economic Review, Vol 85, pp 1029–1046.  Frank, T, 2007, International Trade and Tariff Problems, Ginn and company Publishers. Read More