Factors influencing exchange rates, Managerial Economics

Factors influencing Exchange Rates

i. Inflation:  Other things being equal, a country experiencing a high rate of inflation will experience a lower demand for its goods while its trading partners goods whose rate of inflation is low will now appear cheaper to citizens who will thus buy more.  Thus demand for its currency will decrease while the demand for its trading partners' currencies will increase, and both the factors will cause a depreciation in the external value of its currency.  If on the other hand, a domestic rate of inflation is lower than that of its trading partners these factors will be expected to work in reverse.

ii. Non-trading factors:  Exchange rates re also influenced by invisible trade, interest rates, capital movement speculation and government activities.

iii. Confidence:  A vital factor in determining the exchange rate is confidence that most large companies "buy forward" i.e. they buy foreign currency ahead of their needs.  They are thus very sensitive to factors which may influence future acts such as inflation and government policy.

Thus, the exchange rate at any particular moment is more likely to reflect the anticipated situation on country rather than the present one.

Posted Date: 11/30/2012 5:30:42 AM | Location : United States







Related Discussions:- Factors influencing exchange rates, Assignment Help, Ask Question on Factors influencing exchange rates, Get Answer, Expert's Help, Factors influencing exchange rates Discussions

Write discussion on Factors influencing exchange rates
Your posts are moderated
Related Questions
Market research operations to obtain reliable and relevant information about the trends in market. A data analysing and processing system to estimate as well as evaluate the s

Prices of other related goods i)           Substitutes:   If X and Y are substitutes, then if the price X increases, the quantity demanded of X falls.  This will lead to inc

Imagine an amusement park with a sole attraction: a roller coaster. For simplicity, the cost of providing a ride is zero. There is a single consumer with demand for rides on the ro

Oligopoly can be characterized as follows: Small Number of Sellers: There are more than one sellers of a product though; the number isn't so huge in order to produce perfect

Q. Explain Discrete-event simulation? Discrete-event simulation: Operation of a system is signified as a chronological sequence of events. Every event take place at an instan

Calculate point elasticity of demand for demand function Q=10-2p for decrease in price from Rs 3 to Rs 2

Importance of Income Elasticity If a country is experiencing economic growth, the income of the people will increase.  However, for those engaged in the production of goods wi

Investment   Investment is the process of increasing the productive capital stock of a country, or can be defined as the production of goods not for immediate consumption.  T

Infant Industry Argument Advocates of this maintain that if an industry is just developing, with a good chance of success once it is established and reaping economies of sale,

The following represents the section headers you should consider for your reasoned document.   Each section should have (at least) two research citations to support your work :