Grade 9 Business IGCSE
____________________________________________________Penabur International____________________
- 8.2.1: Discuss whether a change in the exchange rate will always solve a country’s deficit on the current account of its balance of payments.
Last date for Submission:
May 18th, 2014
Please Write Your Response in 750 Words
Note:
Marks allocation for this article is 20.
Rubrics for Marks.
A. Theoretical Explanation 5 Marks
B. References. 5 Marks [Use Harvard referencing style]
C. Use of Key words. 5 Marks
D. Evidences in the support of explanations 5 Marks
A current account, according to investopedia.com is “defined as the sum of the balance of trade (goods and services exports less imports), net income from abroad and net current transfers” which demonstrates which country is a net borrower and a net lender, and is heavily influenced by the exchange rate of a country. Having a change of exchange rate may be both a benefit or a limitation, depending on the country’s position, either with a strong and stable exchange rate or a low and unstable one, as well as the government’s skillful tactics and extensive knowledge about the local and foreign economies.
ReplyDeleteThere are many ways exchange rates influence an economy, such as when demand for foreign goods and services increase. By being an importer, countries will have to buy the nation’s currency in order to sell the goods and services in the country. As more and more foreign companies start exchanging more of the currency, the currency’s demand will rise, causing the “price” of the currency to appreciate. With little or no trade restrictions, foreign firms may also be able to dominate the market from this, meaning that if there becomes a certain crisis in this foreign country, the local economy will also be heavily affected. By having a strong and pricey currency rate, consumers will have increased purchasing power from a wide variety of goods and services from both local and foreign brands, ensuring totally fair competition, which leads to a competitive market, expanding the economy.
When a country is trying to increase in exports and reduce in imports, the government will sketch up a plan to purposely invest more in other currencies and try to produce more money in its national bank. This makes the local currency weak, and other countries’ strong, causing the export prices of goods to drop, increasing demand for these goods and services. When the country’s exchange rate is weak, this makes prices of imported goods more expensive, causing the purchasing power to fall in the country, ultimately contributing to less aggregate demand and profits.
However, without proper planning, research and knowledge of the local economy as well as the foreign economy, it is very risky as the outcomes may be far from expected. The exchange rate is unstable, thus this can provide total uncertainty towards the goods and services to export or import, causing the consumer patterns to change. In the long term, if the government is unable to succeed in steadily strengthening the currency rate of the country, this can lead to a series of problems such as high inflation rates, low living standards, low purchasing power and even higher absolute poverty levels.
ReplyDeleteAlso, even if the government’s attempt to weaken the currency succeeds, it ultimately depends on the aggregate demand and supply of the other countries, as well as the prices sold in other countries as well. If the prices of goods locally made in that country are cheaper due to a comparative advantage and trade restrictions in the particular country, then demand for the goods made by the foreign company will fall.
In conclusion, a change in exchange rate will not always solve a current account deficit. Playing with the exchange rate can cause serious damage for the local economy, like higher inflation rates, lower living standards, lower purchasing power, less variety of goods and services and even higher absolute poverty levels, which may pose an even bigger threat to the current account than the country is already experiencing.
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References:
- http://www.investopedia.com/articles/basics/04/050704.asp
- http://hongkongmacro.blogspot.com/2007/10/current-account-and-exchange-rate.html
- http://www.bized.co.uk/virtual/bank/economics/markets/foreign/further2.htm
- http://www.investopedia.com/terms/c/currentaccount.asp
CHRISTHOPER MATTHEW (9Bus./ 03) (18/05/2014)
ReplyDeletePlagiarism Check (smallseotools.com/plagiarism-checker/): 100% Unique Content
When a country experiences a deficit on its current account, it means the country is buying more imports and/ or losing its export trade. Therefore, a country should prepare more of its country’s currency to pay for its imports, while people overseas will have to prepare less of their currencies when they want to pay for their imports (the country’s exports), so demand for the country’s currency will fall and depreciate. A change in the exchange rate can either increase/ decrease, and both have different effects.
When the value of the country’s currency increases (appreciates), and people overseas want to buy the country’s exports, demand for the exports will fall as the price of the export after exchanging the currency is higher. When the country loses its export trade, one’s country’s current account balance will be deficit.
While when the value of the country’s currency decreases (depreciates), demand for people who want to buy the country’s exports will increase because the price after exchanging the currency is lower. When the country gains from its import trade, the country’s current account balance will be surplus.
To conclude, a change in the country’s exchange rate will not solve the problems when a country experiences a deficit on its current account, as a country’s current account balance will be a surplus only if the country’s currency depreciates. When it appreciates, there will be less demands for the exports, so the current account balance will be deficit as it loses its export trade.
Current acocunt deficit when a country import more goods to the country, this mean they consume more goods but produce less goods (export less to the other countries),this was cause because the current account record international income , direct transfers for capital. It consist of 2 components trade deficit deficit in net income.
ReplyDeleteThe exchange rates can be afected when the country made more export with other countries, the curency of the country will appreciates if this happen but the exchange rates of the countries will be depreciated if they import more goods than the number of the goods that they exported to the other countries.The imports and exports of the countries invisible goods is also effect their exchange rates since the work force recieved a money in the national curency and they will send it back to the countries where they came from for ex for their family,parents , and others. For ex Indonesia is looking for a high skilled labour who come from America , the labours will recieved their curency in Idr but they will exchange it into dollars when they go back so the curency of Indonesia will be depreciated when the labour made a direct transfer payments.
The exchange rates can also be afected by the foreign direct investment , The curency will be appreciate or depreciate based on the government actions and the countries conditions. For ex when the country have an exceed foreign direct investment more than their saving , at some time the investor will draw their money if they don't recieved any reasonable profit in a specific time.
But the appreciation and depreciation of the countries curency can bring a benefitand desadvantages to the countries.When the curency of the countries appreciate the country imports from other countries will be cheaper but they will recieved less demand for the products that they produced since it becomes more expensive when their curency apreciates. But it also bring benefit to the countries when tehir curency depreciates the demand of the countries export is higher since now the goods and services is cheaper when curency of the countries depreciates and they will also import less goods and services since the imported goods become more expensive. It can lead to the country economic developments when the country have low import and high export.
So in conclusion a country should have a stable exchange rates so the number of export and import of the countries will also be stable. But if the countries exchange rate is not stbale it can bring poverty and recession to the countries it will also boost up inflation in the countries.
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souces from : 1) http://www.investopedia.com/articles/03/060403.asp
2) http://www.investopedia.com/articles/basics/04/050704.asp
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