Grade 9 Business IGCSE
____________________________________________________ Penabur International____________________
- 8.2.2:Discuss whether an economy would always benefit from a fall in its exchange rate.
Last date for Submission:
May 25th, 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
No, the country that have a weak curency have some limitation and benefit. But a weak curency for a developing country is good since they can have a greater demand for export of goods & services from other countries since their curency are weaker so there is a cost benefit for other countries who purchase the imported goods. But a weaker curency also mean a lower purchasing power in the market and it will increase the price of the imported goods.
ReplyDeleteIt brings a certain benefit to the countries. It atracts a bigger market for the foreign direct investment since the curency is weak , the foreign company can make a investment in the countries by considering a cheaper materials , labours , and others. It also increases export since other countries can purchase the countries exported goods with a cheaper prices. It can also increase the gdp of the countries since the imported goods & services increases as the exchange rate is falling , the consumer will start finding a better alternatives a local goods & services which is cheaper.
But there is also some limitation in the countries weak exchange rate such as : the price of imported goods from other countries will rise since the country now have a lower purchasing power in the trade and it will also make the imported a certain imported material which is used to produce the goods and services in country to rise and it will increase the price of the local goods & services in the countries and it will caused inflation in the countries , it will also reduce the profit of the importers in the country since the demand of imported goods increase as the price of it increases in the market and it reduce the value of the foreign company for ex : shell is worth as 1 billion idr but now as the IDR goes weaker it only worth $90000.
So the fallen of the countries exchange rate is not always benenficial to the countries if the government and the market does not take the right action based on the economics conditions , and it will bring inflations to the country that can caused the increases in the unemployement rate and poverty in the countries.
Caused by speculation, interest rates and inflation rates, a fall in the exchange rate mainly influences the exports and imports of a country in both positive and negative ways.
ReplyDeleteThe benefits of a fall in exchange rate is, as the country’s currency depreciates, the prices of exports will fall, making it price elastic in the Price Elasticity of Demand (PED) of a country, which is “a small change in price accompanied by a large change in quantity demanded” according to Investopedia.com. With this in mind, this can prosper the country with increased and rapid economic growth, generating more revenue for local businesses, causing them to advance in the technology, increase employment rates as more people are needed to supply enough output (aggregate supply meets aggregate demand) and create fierce competition with foreign mulitnationals, which for consumers is a great advantage, as goods and services are in more variety and in lower cost due to competition, increasing purchasing power and influencing the standard of living in a country.
The balance of payment of a country (particulary the current account) can improve as well due to the higher exports, equalizing the exports and imports of a country, or in long term provide a positive current account.
“C$ support came on the back of inflationary data hit the BoC's target rate, "higher energy costs boosted annual inflation and the uptick alone reduced the likelihood of a rate cut as the next move by the Bank of Canada rate, supporting the loonie," says Joe Manimbo at Western Union.”
From this statement, it shows that in some cases, like in Canada, the weakening of a currency valuates the inflation rate in a good way, even without government interference in the market (such as lowering interest rates, which is what the Bank of Canada was about to do if inflation rates did not valuate to reduce foreign direct investment in Canada).
Despite astounding benefits, falling currency rates affects the imports badly. As prices rise for imports, the aggregate demand for the goods and services fall, leading to high inflation rates due to the inaffordability of goods and servies produced, causing lower purchasing power. Another limitation is that the employment rate also drops (even with the help of the booming domestic market) due to the shrinking of foreign companies’ market share.
ReplyDeleteThis also leads to lower foreign direct investment, particularly affecting the capital account of a country as it becomes unattractive to foreign investors due to its high costs of production and lower-than-anticipated revenue.
“The June and July hikes (of interest rates in 2013) were not enough, given dwindling confidence in the country's outlook because of slowing growth, surging inflation and - to many the most troubling - the widening current-account deficit, now at one of its biggest levels on record.
The past two weeks has seen flight from Indonesian shares. At one point on Wednesday, the main index .JKSE was down more than 18 percent from an August 14 peak. On Wednesday, stocks rebounded to rise 1.5 percent and on Thursday they were up 1.7 percent, with part of the gain coming after the rate-hike announcement. For the year, the benchmark index is down 4.9 percent.”
Even with the efforts of improving the current account by hiking interest rates, the factor of sluggish economic growth and the current account deficit have caused foreign investors to flee from Indonesia as the currency rate is weakening, down by 4.9% for the year of 2013.
Another disadvantage is that, with a fall in currency rates, this does not mean that in can affect the market greatly; as exports can be price inelastic in the PED, which is when “a large change in price is accompanied by a small amount of change in quantity demanded”. In many cases, even with a fall in currency rates, another country may also produce the same good or service in even lower rates. This does not affect the currency rates tremendously, thus both imports and exports may still suffer from the international market of goods and services in a country.
In conclusion, the most effective way of accepting the fall in exchange rate is to let the exports and imports balance itself out from the market without government interference. Even through sluggish conditions and economic hardship from the weakened currency, or increased economic growth from exported goods and services, with little patience and trust in the country’s economy, the exports and imports will always balance each other out.
100% Unique Content (without inputting statement references)
References:
- http://www.investopedia.com/terms/p/priceelasticity.asp
- http://www.currencywatch.co.uk/index.php/today-s-news/260-canadian-dollar-cad-exchange-rate-forecasts-against-us-dollar-pound-euro-45345435
- http://www.reuters.com/article/2013/08/29/us-indonesia-economy-rate-idUSBRE97S12U20130829
---REPOST--
ReplyDeleteA fall in exchange rates, caused by speculation, interest rates and inflation rates, is the main influence of a country’s exports and imports, in both positive and negative manners.
In a country, the benefits of currency depreciation will make the price exported goods to fall. Thus, the aggregate demand for exports increase, increasing profits and sufficient capital for R&D, expansion, etc. causing a balance of payment in a country’s current account, which can also lead to a surplus in the long term.
The market is also influenced, since the increased economic growth leads to higher employment rates since more output is needed to meet aggregate demand. The result of increased economic growth also creates a more competitive market, a total gain for consumers as there is a wider variety of goods and services produced (imported and exported) in cheaper prices due to the fierce competition, causing purchasing power and living standards to increase for the country’s people.
“C$ support came on the back of inflationary data hit the BoC's target rate, "higher energy costs boosted annual inflation and the uptick alone reduced the likelihood of a rate cut as the next move by the Bank of Canada rate, supporting the loonie," says Joe Manimbo at Western Union.”
From this statement, it shows that in some cases, like in Canada, the weakening of a currency valuates the inflation rate in a good way, even without government interference in the market (such as lowering interest rates, which is what the Bank of Canada was about to do if inflation rates did not valuate to reduce foreign direct investment in Canada).
But despite positive advantages of depreciating currency rates, the imports into a country is affected negatively. As prices for imported goods rise, aggregate demand for the goods and services will fall. When this happens, less people are able to afford certain goods and services with lower purchasing power, resulting into monetary inflation, when prices soar high for imported items. In retrospect, the living standards will also fall due to the higher prices in imported goods and services.
ReplyDeleteAnother limitation is, with sharp falls in aggregate demand, the Foreign Direct Investment (FDI) will fall as well, influencing the country’s capital account, thus making potential investors unattracted towards the country, and causing FDIs already in the country flee from it if the currency weakens even further.
“The June and July hikes (of interest rates in 2013) were not enough, given dwindling confidence in the country's outlook because of slowing growth, surging inflation and - to many the most troubling - the widening current-account deficit, now at one of its biggest levels on record.
The past two weeks has seen flight from Indonesian shares. At one point on Wednesday, the main index .JKSE was down more than 18 percent from an August 14 peak. On Wednesday, stocks rebounded to rise 1.5 percent and on Thursday they were up 1.7 percent, with part of the gain coming after the rate-hike announcement. For the year, the benchmark index is down 4.9 percent.”
Even with the efforts of improving the current account by hiking interest rates, the factor of sluggish economic growth and the current account deficit have caused foreign investors to flee from Indonesia as the currency rate is weakening, down by 4.9% for the year of 2013.
Also, in terms of the demand of the exported goods out of a country, the price elasticity of demand is inelastic, as other countries supplying the same good or service may still sell their goods at even lower prices, thus the country’s export demand doesn’t tremendously increase.
In conclusion, a fall in the exchange rate can be accepted throughout the country by letting the exports and imports balance itself, without the need of government interference. Whether a country is either prospecting through rapid economic growth or suffering from less foreign direct investors, in the long term all the aspects are taken into account by the market itself, balancing the exports and imports of a country.
References:
- http://www.currencywatch.co.uk/index.php/today-s-news/260-canadian-dollar-cad-exchange-rate-forecasts-against-us-dollar-pound-euro-45345435
- http://www.reuters.com/article/2013/08/29/us-indonesia-economy-rate-idUSBRE97S12U20130829
Dear Rachelle,
ReplyDeleteThis is much improved version of the writing that you showed to me in the school. Their are certain issues need to be considered for final draft.
First you did not mention the introduction for this question.
Secondly, Can be straight, like depreciation of currency in a country can make export of the country cheaper comparatively. Given inelastic product demand and no change in currency rate by other countries will lead to a rise in export and thus will improve the Balance of payment with rest of the countries. Thirdly, the currency depreciation will make the imports expensive and will reduce the overall expenditure on the them if imported products are price elastic. On the other side, depreciation used as a policy measure to reduce the imports and increasing export may result in trade war. Negatively effected countries may put embargoes or raise tariff duties against the countries major exports. Be care full of economic growth its a wider aspect can not be solely effected by Depreciation. I appreciate your excellent efforts. keep it up. Well done.