International trade and foreign exchange rate

Besides, the long-run level of the RER should be kept low — i.

What is exchange rate

To enlarge the scope of the foreign Exchange Market, Bureaux de Change was introduced in for catering of privately sourced foreign exchange in the country. Normally, the RER is computed for a basket of goods — with weights that coincide with the share of these goods in GDP — of one country or another, or the geometric average of weights in two countries. If it is judiciously utilized, it can serve as nominal anchor for price stability. The government can increase contributions to a stabilisation fund in the case of a positive balance-of-payments shock and draw on resources from the fund in the case of a negative shock. Among major resource exporters only Norway — an oil exporter — and Botswana — a diamond exporter — may have enough money in FOREX and stabilisation funds, i. If monetary authorities pursue a sterilisation policy — i. Consequently, exchange rates are among the most watched, analyzed, and manipulated economic measures. This is usually explained by the Balassa-Samuelson effect, which I discuss later. Economic Journal, 90, pp. Movements in the exchange rate have ripple effects on other economic variables such as interest rate, inflation rate, unemployment, money supply, etc. In other words, it links domestic prices with international prices. IMF Economic Review, 60 4. According to Oladipupo and Onotaniyohuwo , exchange rate plays a key role in international economic transactions because no nation can remain in autarky due to varying factor endowment. The formal model demonstrating how an accumulation of reserves can spur growth, as well as the empirical evidence, is presented by Polterovich and Popov

The mercantilist view — that undervaluation of the exchange rate via an accumulation of foreign exchange reserves is in fact an industrial policy aimed at promoting export-oriented growth, which benefits exporters and producers of tradables at the expense of the producers of non-tradables and importers — is gaining support in the literature Dollar, ; Easterly, ; Polterovich and Popov, ; Rodrik, ; Bhalla, Finally, The Autonomous Foreign Exchange Market metamorphosed into a daily Inter-Bank Foreign Exchange Market IFEM in at the inception of the new civil democratic rule in the country which vigorously embarked on privatisation, free market economy and liberalised foreign exchange regime.

Since no country has grown without trade, foreign trade plays a vital role in restructuring economic and social attributes of countries around the world, particularly, the less developed countries.

terms of trade and exchange rate

If the shock is negative, reserves in most countries are barely enough to withstand several months of deterioration in the terms of trade and several weeks of capital outflows. Even more so, they seem to be pro-cyclical, rather than countercyclical: when terms of trade deteriorate, capital flees the country instead of coming in.

The work will make use of secondary data collected from CBN report and statistics analysis will be done to see the relationship of these variables.

effects of exchange rate fluctuations on businesses

This is precisely the reason why policies to build up FOREX and sovereign wealth funds face heavy criticism at home and abroad: why not use this money for the improvement of healthcare and education, for helping the poor, and for investment in ailing infrastructure, say the critics.

The formal model demonstrating how an accumulation of reserves can spur growth, as well as the empirical evidence, is presented by Polterovich and Popov For example, one U. The empirical evidence suggests that this is true for most countries.

How exchange rates affect imports and exports

So long as the international financial architecture remains as it is, countries will basically be left to themselves to manage shocks that affect their current and capital accounts. Movements in the exchange rate have ripple effects on other economic variables such as interest rate, inflation rate, unemployment, money supply, etc. The workings of an economy in terms of growth rate and per capita income have been based on the domestic production, consumption activities and in conjunction with foreign transaction of goods and services Akeem, These include all of the following: Relative rates of inflation Growth of domestic money supply Size and trend of a country's balance of payments Economic growth as measured by the gross national product Dependency on outside energy sources Central bank intervention In addition to these measures of economic activity, the consensus perception of a majority of countries about the overall strength of one country's currency can have a strong impact on how that one country's currency is valued. Misaligned Currencies and Their Growth Consequences. Banks and fund managers trade currencies to profit from FX rate movements. Federal Reserve Bank of San Francisco. Laeven, L.
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Exchange Rate Effects of U.S. Dollar Dominance in International Trade