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
Household This refers to all the people who live under one roof and who make or are subject to others making for them, joint financial decisions. The household decisions are a

The demand curve Suppose that starting from a condition of equilibrium, the price of X falls relative to Y.  We now have a condition where the utility from the last shilling s


In regards to air pollution, use a diagram to show and explain how the existence of pollution can make the market equilibrium inefficient.

Q. Describe Rule based forecasting? Rule based forecasting: Rule-based forecasting (RBF) is a proficient method which incorporates judgment as well as statistical techniques

Ask questiHow does economic theory contribute to managerial decisions? on #Minimum 100 words accepted#

Using the National Output for Calculating National Income A final method which is more direct is the "output method" or the value added approach .  This involves adding up

The Consumption Function The consumption function is the relationship  [expressed in mathematical or diagrammatic form] between planned consumption and other independent varia

BUSINESS CYCLES Meaning: The business cycle is the tendency for output and employment to fluctuate around their long-term trends.  The figure below presents a stylised

Q 3. What is Demand Forecasting? Explain in brief various methods of forecasting demand.