First Response Paper

From: Peng Wang

09/02/2013

When we want to discuss why do exchange rates have an effect on the trade balance, we need to figure out what is the trade balance and exchange rate first. According to my knowledge, the trade balance refers to the value of all the goods and services we sell to other countries (exports) minus the value of all the goods and services we buy from foreigners (imports). There are three results of the trade balance : trade surplus, trade deficit and trade even. The exchange rate refers that between two currencies what is the rate at which one currency will be exchanged for another.

In m opinion, the currency is just like any other commodity; its price will go up and down depends on supply and demand. The supply is decided by the government's printing press. The supply is not always constant , governments can always print more money, or buy more bonds in return for returning more dollars into the economy, then demand is the most important factor which is mainly depends on the customers in that country. In all markets, currency is affected by its supply and demand. The supply and demand for a given currency also results in changes to its value. The more foreign countries want to hold a certain currency, the more it is worth, and the less they want it, the less it is worth. There are many factors that affect demand for a currency, such as interest rates between countries, political factors, expectations and trade balance.

Where we saw that a fall in the exchange rates which means that the value of money decreases, people would like to buy more domestic product and do not waste money on buying foreign goods. When a increase in the exchange rates which means that the value of money increases, people would like to buy more foreign