...Name: Azwirah Yasin Course: Econs 001 Title: The strength of a currency reflects its credibility. Or is it the other way round Date: 11/21/2014 In this world of globalization, every country have the strong desire to move the nation forward and nurture their determination to sustain, develop and increase its power among other countries. It is indeed a known fact that we somehow have the richest country to the poorest country, each striving to attain credibility and integrity with countless ways done by their government, Congress, President and society. In short, money plays a massive role in the global economy. Back when I was a teenager, I used to follow my uncle to his work as he owns a money changer and observe blindly how the currency in my country, Malaysia changes from day to day. I would be asking myself about the reason and the aftermath for the currency change. I was told that having a strong currency is what a country would strive in the end. A strong currency means a strong nation, thus a richer country. I began to question the rightness of the fact. Does the strength of the currency really reflect the credibility of its nation? In general, according to an article on New York Times, it is said that ‘The supply of dollars to the foreign exchange market comes from Americans who want to buy goods, services or assets from abroad. The demand for dollars comes from foreigners who want to buy from the United States.’ As said, when there is a high demand, the dollar...
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...the next decade. They have better access to factors of production, reduced risk, and an inflow of new ideas. 2. Explain how to calculate the balance of trade. How does the growing United States trade deficit impact the economy? Why? To calculate the balance of trade you get the difference between a nation’s exports and imports. The growing United States trade deficit impacts the economy in which the growth may slow over the next few years because of the global economic crisis. 3. Explain the meaning of “strong” currency and “weak” currency. What are the advantages and disadvantages of each? Strong currency is a currency that is improving compared to other currencies. Weak currency is when the currency has fallen in value. Weak currency is the complete opposite of strong currency. An advantage of strong currency would be that it lowers inflation. A disadvantage of strong currency would be that it increases the cost of housing. An advantage of weak currency would be that it would have profitability for companies. A disadvantage would be that foreign goods will be more expensive. Application Question 1. Take a look at Fortune magazine’s most recent list of the 500 largest global companies. What are the top three industries on the list? What three countries appear most frequently? What firms have fallen off the list, and who are the new arrivals? Does a particular industry or country seem to be on the move? Consider what the answers to these questions tell you about...
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...dollar has decreased in value compared to other currencies, making the U.S. dollar now, but less of the other currency than before (depreciation of the dollar). For the purpose of this paper a weak dollar perspective will be used throughout the development of the same. It is said that when the dollar is weak or depreciate against other currencies, several effects may be encountered. In other words, we have pros, but also cons as a consequence of such depreciation. After researching about the advantages and disadvantages of a weak dollar a compilation of them was listed below: Advantages • U.S. goods and services become cheaper abroad, therefore export increase. • Other countries goods and services become more expensive and as a result; imports decrease. • Net imports (exports-imports) increases and as a result an injection of inflow money is added to the GDP of the U.S. • U.S. goods increase its competitiveness promoting the overall sales of the country. • High demand of goods may also imply an increase of jobs and a reduction...
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...disadvantages of a weak versus a strong dollar for imports, exports, international and domestic markets? Explain how foreign exchange rates are determined? Foreign exchange rates exist because banks buy and sell foreign currencies from other countries in large quantities. Exchange rates exist in the U.S. dollar, Europe euros, Japanese yen, British pounds, Canadian dollars, Australian dollars, and much more. There are currently two main systems that are used to determine a currencies exchange rate. The floating currency sort of works like the supply demand method. This system is normally used for countries that are in a stable economy. These exchanges are considered more efficient because the market will correct the rate to reflect inflation and other economic forces automatically. The downfall of this system is that it can discourage investment. The other system is a pegged or also known as a fixed system. This is the system that is used when an exchange rate is set and artificially maintained by the government. The rate will be pegged to other countries dollar and does not fluctuate from day to day. How do changes in interest rates, inflation, productivity, and income affect exchange rates? Exchange rates affect different areas in the economy such as interest rates, inflation, productivity, and income. The exchange rate is referred to the supply and demand method. If a certain country has high interest rates, then more investors will be willing to purchase currency which increases...
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...semester-long exchange programs. The high school division, which was founded as the American Council for International Studies (ACIS), is controlled by Becky Tabaczynski and sends high school students and their teachers on 1-4 week long trips. This nature of business involves a certain amount of bottom-line risk. AIFS focuses largely on American students studying abroad, therefore the majority of their revenue is in American Dollars (USD). However, AIFS costs’ are generally incurred in foreign currency (primarily Euros (EUR) and British Pounds (GBP)) because the services they arrange for happen abroad. Due to their business activities involving foreign currencies, an unfavorable change in the exchange rate could result in a higher cost base, and potentially a loss overall if the change is significant enough. Inherently, due to the nature of their business, AIFS is exposed to currency risk because they are dealing in multiple currencies, however there is another factor that gives rise to currency exposure as well; the AIFS price guarantee. AIFS’s business is catalog-based, which means they have to set their prices well in advance of the actual service provided, general by June 30th of the previous year. Once they decide on the price and list it in the catalog, they guarantee that the price will not change until the...
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...* U.S. companies remained the most popular targets for emerging market companies with 31 acquisitions made in the United States in the first half of 2013, down from the 52 deals completed in the second half of 2012. The buyers came from South and East Asia (9) and India (7). The region accounted for the majority of acquisitions of U.S. companies so far this year. Emerging market to developed market transactions fell to their lowest level since 2005. Many high growth market companies are taking a ‘wait and see’ approach before investing in developed economies because many of them are experiencing varying degrees of economic uncertainty,” said Barnes. “The United States continues to remain the developed market of choice for (these) deals due to its many positive attributes including market size, plentiful resources, and skilled workforce,” he said. * Foreign direct investment (FDI) is the single largest source of capital inflows for developing countries. In industrialized countries, the size of FDI inflows ranges from zero to almost half the size of gross fixed capital formation. Surprisingly, the impact of exchange rate variability on FDI rarely enters debates over exchange rate management or monetary policy. One reason for this omission could be the lack of conclusive evidence regarding the impact of exchange rate variability on the investment behavior of multinational firms. A long list of studies provide patches of evidence that multinational firms are likely to consider the...
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...imports and also capital inflow into the country due to the high interest rates. Since the government wanted to make Brazil competitive for exports, a weak currency would dissuade companies from exporting since they would earn less in revenue for every $ exported. Further with a free currency and no capital controls, the ease of investing and removing capital would make the Brazilian stock market (which as it is, is very small) more susceptible to foreign capital. b. Medium term (1-2 years)? In the medium term, the movement in the real would dependent on several factors such as: global sentiments, status of the euro crisis, relative attractiveness of other market (such as Mexico, Africa, South East Asia) etc., However it would be ideal if the real was stable in the range of R$2 +/- 10% This would ensure stability in the economy and capital markets. A strong currency would encourage imports while a weak currency would discourage investments. Further a weak currency would also make the corporates in Brazil nervous as they will need to pay more reals for every $ of debt on their books. Would these be adverse developments for Brazil? Why? I think it is important to have stability in the currency before allowing it to float freely. Brasil is still an emerging economy and needs to have a scrupulous approach to its currency & monetary policy. It not only needs foreign capital for development but also needs to have a balanced current account. Further given the financial...
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...system, governments will allow exchange rates move according to market forces; however, they will intervene when they believe it is necessary. A freely floating system may help correct balance-of-trade deficits since the currency will adjust according to market forces. Also, countries are more insulated from problems of foreign countries under a freely floating exchange rate system. However, a disadvantage of freely floating exchange rates is that firms have to manage their exposure to exchange rate risk. Also, floating rates still can often have a significant adverse impact on a country’s unemployment or inflation. 2. Intervention with Euros. Assume that Belgium, one of the European countries that uses the euro as its currency, would prefer that its currency depreciate against the dollar. Can it apply central bank intervention to achieve this objective? Explain. ANSWER: It can not apply intervention on its own because the European Central Bank (ECB) controls the money supply of euros. Belgium is subject to the intervention decisions of the ECB. 3. Direct Intervention. How can a central bank use direct intervention to change the value of a currency? Explain why a central bank may desire to smooth exchange rate movements of its currency. ANSWER: Central banks can use...
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...Production in UK: Percentage change year-over-year Source: www.tradingeconomics.com During the prosper economic period of the 1980’s there was strong private investment on household, meaning that the mortgage credit rose significantly. In the beginning of the 1990’s the level of private debt was unbearable (Graph 1). Graph 1 - Debt to income ratio Source: Bank of England High rates of unemployment, high private debt and lack of macroeconomic surveillance tools have been pointed out as the main reasons for the economic recession of the early 1990’s. A sharper control over macroeconomic policies as well as an effective control of inflation and the defense of competitiveness of the sterling within Europe was some of the goals the British government aimed at by joining the ERM. A central exchange rate for each participating currency was established against the ECU, the artificial unit of account that set the pillars for the Euro currency. In practice, the participating currencies where actually pegged to the German mark, which was the most stable currency of the group. Still, there was no existing European central bank. So each national central bank was responsible for the control and maintenance of economic stability. Among other aspects of the arrangement, a lending mechanism was established, in which strong currency banks would help the weakest countries. Because of its credibility and success in...
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...Chapter 2 International Flow of Funds Lecture Outline Balance of Payments Current Account Capital and Financial Accounts International Trade Flows Distribution of U.S. Exports and Imports U.S. Balance of Trade Trend International Trade Issues Events That Increase International Trade Trade Friction Factors Affecting International Trade Flows Impact of Inflation Impact of National Income Impact of Government Policies Impact of Exchange Rates Interaction of Factors Correcting a Balance of Trade Deficit Limitations of a Weak Home Currency Solution International Capital Flows Distribution of DFI by U.S. Firms Distribution of DFI in the U.S. Factors Affecting Direct Foreign Investment Factors Affecting International Portfolio Investment Agencies that Facilitate International Flows How Trade Affects an MNC’s Value Chapter Theme This chapter provides an overview of the international environment surrounding MNCs. The chapter is macro-oriented in that it discusses international payments on a country-by-country basis. This macro discussion is useful information for an MNC since the MNC can be affected by changes in a country’s current account and capital account positions. Topics to Stimulate Class Discussion 1. Is a current account deficit something to worry about? 2. If a government...
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...country’s economy would suffer from weak currency, high inflation rate and high interest rate. This situation might continue for several years. The Greeks’ living standard then would become much worse than now. Secondly, Greece cannot benefit a lot from the weak currency. The current dominant industry in Greece is the tourism. Greece doesn’t have many natural and labor resources, and doesn’t have high-tech industries or large scale of manufactures or services industries which are strong enough to drive the economy. So, the weak currency cannot benefit the export. It might benefit the tourism, but the prosperity of the tourism is not strong enough to drag Greece from the deep debt mud. Finally, if the Greece exit Eurozone because of the veto of fiscal austerity, then the Greece government might continue the high welfare and high tax social security system. Although the fiscal austerity imposed by creditors of the Eurozone is a little over strict, the fiscal austerity is somehow right on the track. The high welfare system is a very heavy burden for the economy which not only cause a lot of government debt but also demotivate labor force. We can see the effect of the fiscal austerity during 2011~2014, the GDP increased from -8% to -0.2%, which means that the economy is becoming better. From the Eurozone point of view, Greece should be kicked out. Historically, Greece became a member of the Eurozone by cheating. Greece was able to enter the Eurozone currency block after claiming its deficit...
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...the U.S. economy due to China’s devalued currency against the U.S. dollar. China’s devalue in their currency and has now has their banks allowing is to set exchange rates in line with free market practices making them more market-oriented in terms of exchange rate which is something American officials want. In April, right before the crash of China’s stock market, the U.S. Treasury Department was praising China for their recent efforts in raising their value of their currency since it was undervalued (Swanson, 2015). However, this was short-lived since just after, China’s economy fell and they devalued their already low currency even lower. For many years U.S. Congress and American businesses have said China’s currency was far too weak and China’s set rates allowed their exporters to sell off their good at artificially low prices in the world market. Due to this market force, this allows the currency to depreciate instead of appreciating, allowing Chinese products cheaper compared to American products (Wei, 2015). The Chinese central bank devalued their currency in an attempt focus on exports to boost their economy. Doing so has yet to prove effective in benefiting their economy but their changes are not only an attempt to change their economy, it is changing the U.S. economy due to the low currency they have set against the American dollar. This process is called currency manipulation in which countries sell their own currencies in the...
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...Foreign Exchange Sherie Dover, Jason Godwin, Jonathan Haus, John Strange, and Edgardo Zavala University of Phoenix ECO 360, Economics for Business I Harley Sommers July 17, 2007 Foreign Exchange Introduction Recent Dollar Trend The United States dollar began to fall in world currency markets in 2006. Many economists predict that the United States dollar will decline at an even greater rate in 2007. Economists believe that the United States dollar could lose as much as 30% of its value. The debate that a recession may be around the corner is backed by international trade and Federal budget deficits that are anything but under control (Dissidentnews/Worldpress, 2007). The United States dollar began at 88.86 on the FOREX international currency index in January of 2006. 83.67 is where the United States dollar ended at the end of 2006, a drop of about 6%. In 2006, the United States dollar fell 11.5% versus the euro, 13.6% compared to the British pound, and by 7.3% versus the Swiss franc. Central bankers are expected to move away form the United States dollar with regards to their foreign reserve holdings (Dissidentnews/Worldpress, 2007). China the second largest holder of United States debt reduced its purchases of United States bonds by 1.7% in the first 10 months of 2006. Venezuelan, Indonesian, and the UAE said they will invest lees of their reserves in dollar assets. Iran’s switch to Euros may be the greatest threat to the United States dollar. The use of the euro...
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...China and the United States Jimmy Thompson ECO 372 October 31, 2012 Douglas Holbrook China and the United States The United States would not be the country it is today without its major trade partners. International trades make up a large part of China’s economy, which is the same for the U.S. Both the United States and China share similar structures as far as the market system orientation of trade and economic systems. It is important that China and the United States work together to help the countries strengthen its economic state. China’s Economic Background China is proving to be one the fastest growing, major economies in the world, perhaps even the most dynamic. Since the country opened its reform policy, and began a capitalistic society, the economy has grown drastically. China is the second largest economy by their nominal GDP and by the purchasing power after the U.S. (“Office of the United States Trade Representative”, n.d.). However, along with the United States, China has experienced tough times with a recession, which began in 2008. Since China provides so much of the United States’ goods, they are an extremely attractive country to do business with. Main exports from United States to China China and the United States goods and services trade was approximately $539 billion in the year 2011. With that, our deficit with China in 2011 was $282 billion. As of today, China stands as the...
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...MUMBAI: For India Inc, the rupee's slide comes as another blow at a time revenue growth is slowing and margins are being squeezed. The currency has lost 11% since May. This will adversely impact capital-intensive sectors and firms with foreign borrowings and those who import raw materials heavily. Automobiles, capital goods, petroleum, power and telecom companies will bear the brunt of a weak rupee. But, sectors such as software services and pharma, with major export revenues, will benefit, though the extent of gains at the net profit level will hinge greatly on their foreign exchange hedging policies. Ads by Google • New Launch Villa Project3.5 & 5.5 BHK Luxury Villas in Pune Your island of Peace 2.5cr onwards Gera.in/Isle_Royale_Villas_Bavdhan • HDFC Life™ Term PlanPremium Starts@Just रु 2000/yr. No Medicals upto 75L Cover* Buy Now www.buyhdfcslonline.com The ET Intelligence Group analysed the impact of a weak currency on select sectors. Pharma: Most companies in the sector will gain from the rupee's fall, since a substantial proportion of their revenues comes from exports. A strong US dollar and yen will boost net sales and operating margins. Gainers: The major gainers will be Dr Reddy's Lab, Sun Pharma, Lupin, Glenmark, Wockhardt and Cadilla Healthcare as they derive significant earnings from overseas markets. Analysts reckon that with every Rs 1 movement, the earning per share of these companies will change by 1-2%. For Cipla, which focuses mostly on the domestic...
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