International Trade and Currency Markets

Posted on Apr 4, 2025 in Accounting and Finance

The Market Exchange Rates

Facilitating International Trade

Key elements for facilitating international trade:

  • Relative prices for currency conversion
  • A market for currency exchange
  • A system for managing exchange rates

Transactions are conducted within the currency exchange market.

1. The Currency Market

Currencies are traded for various reasons:

  • Profitability from buying and selling assets
  • Speculation on exchange rate fluctuations

Supply and demand determine the equilibrium price, known as the exchange rate.

  • Currency depreciation: An increase in the amount of domestic currency needed to acquire a foreign unit.
  • Currency appreciation: A decrease in the amount of domestic currency needed to acquire a foreign unit.

2. Demand, Supply, and Equilibrium

a) Demand for Foreign Currency (e.g., USD) or Supply of Euros

  • Importers of foreign goods
  • Tourists spending abroad
  • Investments in foreign countries

b) Supply of Foreign Currency (e.g., USD) or Demand for Euros

  • Exporters of goods to foreign countries
  • Foreign tourists spending domestically
  • Foreign investments in the domestic market

c) Equilibrium Exchange Rates

Supply and demand determine the exchange rate. Variations arise from excess supply or demand.

d) Factors Influencing Exchange Rates

1. Commercial Factors
  • Exports: Driven by external demand, domestic income, and inflation differentials.
  • Imports: Driven by domestic demand, domestic income, and inflation differentials.
2. Financial Factors
  • Interest rates
  • Currency appreciation and depreciation

3. Exchange Rate Systems

a) Fixed Exchange Rates

The government sets a fixed exchange rate, providing certainty for transactions and preventing its use as a trade weapon.

  • If the market rate exceeds the equilibrium rate: The government sells currency, potentially leading to devaluation and implementing policies to curb imports and boost exports.
  • If the market rate is below the equilibrium rate: The government buys currency.

b) Flexible Exchange Rates

  • Demand exceeds supply: Depreciation
  • Supply exceeds demand: Appreciation

International Political Cooperation Agencies

  • United Nations (UN): Focuses on development, environment, and disarmament.
  • Food and Agriculture Organization of the UN (FAO)

Economic Partnerships

  • International Monetary Fund (IMF): Promotes financial stability and manages exchange rates.
  • International Energy Agency (IEA)
  • Development Assistance Committee (DAC)

Economic Development

Development is a historical process involving new technologies. It implies growth, but growth can occur without development, leading to dualistic economies.

Development is driven by:

  • Technical progress
  • Integrated markets
  • Capital accumulation
  • Free trade and export promotion
  • Human capital
  • Social and political conditions

Growth stages:

  • Increased agricultural productivity
  • Industrial sector growth
  • Dominance of the services sector