Free Example of Exchange Rates and International Trade Essay

“Exchange rates are the relative prices of moneys. Evidently, they have monetary causes. But if they do not have a price which is determined by fundamentals in the customary sense, then a further pillar of economic thought begins to totter: the ‘non-neutrality’ of exchange rates is the most important reason for the non-neutrality of money even in the long run”.

Exchange rates compose the price of the monetary unit of a country; it is expressed in the monetary units of the other country. The functioning of the currency market and the dynamics of the exchange rates are closely connected with the international collaboration in the field of trade, cultural exchanges, and interstate interactions with the international investments.

In the financial plan the place, occupied by the country in a global world culture, is expressed by its balance of payments, representing the result of the international financial transactions of the citizens of this country. The Balance of Payments, thus, fixes a ratio of all main types of the international interactions: international trade, movement of the capitals, international services (tourism, etc.), and interstate calculations. The currency exchange market often concentrates its attention on the main compound part of the Balance of Payments - the Trade Balance.

The Trade Balance is the difference between the sums of export and import of the given country. The Trade Balance reflects, first of all, the competitiveness of the goods of this country abroad. It is closely connected with the level of the national currency rates as positive Trade Balance means the positive balance inflow of foreign currency to the country; it raises national currency rates. The negative Trade Balance means a low competitiveness of the goods of the given country in foreign markets; it leads to the growth of external debt and a fall of national currency rates.

On the other hand, the changes of the national currency rates influence the results of the international trade, and, consequently, the Trade Balance. When the national currency rates are low, the goods of this country get an additional benefit if compared with the competitors in foreign markets; it leads to the export growth. On the contrary, the prices of the national goods in foreign markets will grow because of the growth of the national currency rates; it can lead to their replacement by the cheaper goods of the other countries.

It becomes clear why the actions of the most central banks to lower the national currency rates are caused by the aspiration to provide the competitive advantages for the national exporters. In the first half of 1999 it was one of the most important factors of weakening of the British pound and euro, and also the reason of the repeated interventions of the Bank of Japan, willing to prevent a premature strengthening of yen if compared with dollar.