Foreign Trade And Exchange Rate

Foreign Trade and Exchange Rate Foreign Trade Any exchange of goods and services with between two countries • Import Buying goods and services from foreign country • Export Selling goods and services to a foreign country • Balance of trade an account or a statement of country of its export to and import from all the other country in a specific period of time

Benefits of Foreign Trade • Makes goods and services which are not home grown to the home country • Makes things cheaper • Improves quality of life • Knowledge, technology and skill transfer • Conducive to specialization and efficiency • Labor mobilization • Social and political benefits

Balance of Payment (BOP) “Statistical statement that systematically summarizes, for specific time period, the economic transaction of one country with the rest of the world.” (IMF) • Includes Balance of Trade and other components shown in the slides to follow

Components of BOP Current account Net export/Import of goods • and services Net income from • investment and salary and wages Net transfer by migrants • and permanent workers abroad and of gifts, grant, pensions Financial Account Net foreign direct • investment Net portfolio investment • • Other financial items

Capital account • Net transfer due to purchase of capital items and fixed assets

Reserve and related items •

Change of

• Official money reserve •

Gold reserve

• Foreign exchange reserve

Exchange Rate Price of 1 unite of one country’s currency in term another country’s currency • Exchange rate of country A with country B is how much of currency B can be obtained for 1 unit of currency B • Today’s exchange rate of Bangladeshi taka with USD is 0.01454 while other way round is 68.77 (source: yahoo finance)

Fixed and Floating Exchange Rate Fixed/Managed Exchange Rate • When the exchange rate of a country is regulated by its government Floating Exchange Rate • When the exchange rate is determined by the market without any interference of the government

Fixed Exchange rates - Features Exchange rate of the currency is pegged (fixed) with a powerful country • Conservative policy • Helps protect inflation and manipulation • Strict monitoring of foreign trade and maintenance of foreign currency reserve required • Suitable for week and badly regulated economies • Artificial system • Increase and decrease in exchange rate in this system is called Revaluation and Devaluation respectively

Floating Exchange rates - Features • Natural system • Little concern is required with foreign currency reserve • Sometimes problem for developing economies • Increase and decrease in exchange rate in this system is called Appreciation and Depreciation respectively

Determinants of Exchange rate • Balance of payment • Purchasing power of the local currency • Interest rate • Inflation • Political factors • Speculation