Free Essay: The Influence of Different Exchange Rates on Imports and Exports

Exports and imports are the international trade staples that exert an intensive impact on both the economy and consumers. Notably, the most significant determinant of a country's economic performance is the currency value, thus devalued currency may distort a country's trade balance. Economists and traders indicate that when both imports and export are growing economy becomes healthy, implying sustainable trade and financial strength (Cohn 2016). The exchange rate, which is defined by the levels of foreign currencies versus the domestic currency has significant impacts on both imports and exports. Some of the types of exchange rates include; free-floating restricted coins, onshore vs. offshore, currency peg, and spot vs. forward. The different exchange rate between countries has triggered a challenge for both imports and export, and these can be deduced profoundly through the review of the; levels of economic activity in an economy, gains from international, as well as the basic models of a market-based economy trade, that are majorly centered on the strength of both domestic and foreign currency.

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Levels of Economic Activity in an Economy

The feedback loop between nation's exports and imports as well as its exchange rates possess a complicated situation for traders and investors due to the preexisting unpredictable market returns (Amiti, Itskhoki and Konings 2014, p.1942-78). The three levels of economic activity that include; primary, secondary, and tertiary forms a base for the economy since products and good are specified for market supply. The primary level enriches the market with the harvest from the earth that are basic foods and raw material, the secondary level provides finished good, while the tertiary level enriches the market with services; with all the three levels of economic activity, an adequate supply is made for the growing demand worldwide through exports and imports. When a country experiences high supply from the three economic activity levels, a need to find an extra market for the produced goods is fostered a concern leading to international trade engagement. Also, to supplement inadequate production from economic activity, the country might engage in importing exercise. Traders and financial institutions find it hard in choosing derivative securities that enhance profitable portfolio selection based on the currency rate fluctuation. In this case, the global portfolio optimization is faced with a challenge of risk management for both imports and exports, leading to indecision that significantly affects the levels of economic activity influencing the entire country economy.

Gains from International Trade

International trade offers both dynamic and static gains that are beneficial deals for the trading countries. Some of these gains include; expansion of market size, increased products varieties and competition as well as economical scale gains (Edmond, Midrigan and Xu 2015, pp. 3183-3221). Profound knowledge of international gains can be drawn from the different exchange rates that are posed by different strengths of trading currencies. The first case is when the domestic currency is weaker than foreign currency, while the second case occurs when the local currency is stronger than the foreign currency. These two situations acknowledge the impacts of different exchange rates that enriches the trader's decision considering both global economy health and market conditions.

Firstly, when the domestic currency is weaker than the foreign currency, exports are stimulated making the imports more expensive; thus, domestic currency value is a vital instrument in foreign exchange markets (Jayakumar, Kannan and Anbalagan 2014, p. 51-58).To illustrate this concept, both the United States and Indian currencies are considered where the Indian rupee is much weaker than the United States dollar. Using the table of Indian rupee devaluation to US dollar show below to prove the fact that weaker domestic currency stimulates exports resulting in escalated import exchange rates.

Indian Devaluation table to US dollar (Sivramkrishna 2016)

For example; taking a sample of cases where a product worthy $ 20 in the US was exported to Indian market in 2015, where the exchange rate was 63.76 rupees per every US dollar, then the import rates will be ($20 63. 76) = 1275. 2 rupees, when the transactions costs and other shipping costs are ignored (Sivramkrishna 2016). According to Auer and Schoenle (2016, p. 60-77), from 1947, the value of rupee has devalued when compared to dollar value, the Indian importers have found it hard to cope with this high exchange rate forcing them to seek similar and cheap products in other countries. It should be noted that the essence of dollar appreciation by 10% when the compared rupee is the reason behind the diminishing exportation competitiveness of US exporters in the Indian market. Eventually, the fact that a weaker domestic currency attracts exports triggering imports more expensive has been established and proved.

Secondly, when the domestic currency is stronger than foreign currency, the exports are hampered, making the imports cheaper for the traders (Petropoulos 2017, pp.340-345). The situation also can be explained by considering the strength of the US dollar to other currencies apart from the euro currency. Reversing the market situation by considering the Indian garment exporter to the United States market brings an adverse emphasis on the market situation. Assuming that the US was the only primary market for the Indian exporter in 2015, the devaluation table for rupees would also be used in estimating Indian exporter exchange rates against the US dollar (Sivramkrishna 2016). Using the example whereby the Indian exporter sold a shirt worth $20 in America, where the exchange rate was 63.76 rupees in 2015. The marked fetched amount will be given by (63.76rupees $20/$1) = 1275.2rupees, which for this case are the market gain for the Indian exporter in the US ignoring export duties and other costs. If for any change the rupees weaken further to 70. 136 versus the dollar, the Indian exporter, will as well sell the garment at $19.09 receiving similar amount 1275 rupees when rounding off to the nearest whole number, and this incident illustrates why the 10% rupees depreciation versus the US dollar has triggered improvement competitiveness for Indian exporters in the United States markets. The pie chart below shows the Indians exports to the US that is based on reduced import expenses when the domestic currency is stable.

Basic Models of a Market-Based Economy Trade

According to Puschmann and Alt (2016, p.93-99), three basic market models that are used in the improvement of the market economy include; social market economy model (SMEM), free-market economy model (FMEM), and government dominant market model. Firstly, the FMEM is based on consumer's freedom to choose between the competitive market services and products as well as the producer's freedom to expand and share risk internationally or locally. For the case of imports and exports, the FMEM offers are a competitive platform for economical operation. Secondly, the SMEM provides the flexibility and efficiency of market mechanism due to government regulation making the exchange rate for imports and exports much friendly. Lastly, the GMEM, which is mostly used by East Asian Countries, the economic development is dominated by the government; giving plans as well as regulating interest rate that determines the exchange rates; mainly, GMEM, focus on restraining inflation rates that affect both imports and exports. All three markets models serve as a tool for regulating exchange rates.

Ultimately, different exchange rate between countries has triggered a challenge for both imports and export, and these have been deduced profoundly through the review of the; levels of economic activity in an economy, gains from international, as well as the basic models of a market based economy trade, which are majorly centered on the strength of the both domestic and foreign currency. Firstly, it has been established that the international trade provides both dynamic and static gains for a country economy that includes; expansion of market size increased products varieties and competition as well as economical scale gains. Secondly, the primary, secondary, and tertiary levels of economic activities have been proved vital in the market decision of supply and demand, where exchange rates are the centered of the trade. Lastly, the SMEM, GMEM, and SMEM have been identified as the basic market models that provide a market plan, price and interest rates regulation-making market ground for international trade more favorable despite different exchange rate challenge. The international trade can be bettered through the use of stable currency like dollars and Euro among traders rather than the use of domestic currencies that fluctuate periodically.

References

Amiti, M., Itskhoki, O., and Konings, J., 2014. Importers, exporters, and exchange rate disconnect. American Economic Review, 104(7), pp.1942-78.

Anand, R., Kochhar, M.K., and Mishra, M.S., 2015. Make in India: which exports can drive the next wave of growth? (No. 15-119). International Monetary Fund.

Auer, R.A., and Schoenle, R.S., 2016. Market structure and exchange rate pass-through. Journal of International Economics, 98, pp.60-77.

Cohn, T.H., 2016. Global political economy: Theory and practice. Routledge.

Edmond, C., Midrigan, V. and Xu, D.Y., 2015. Competition, markups, and the gains from international trade. American Economic Review, 105(10), pp.3183-3221.

Jayakumar, A., Kannan, L., and Anbalagan, G., 2014. Impact of foreign direct investment, imports, and exports. International Review of Research in Emerging Markets and the Global Economy, 1(1), pp.51-58.

Petropoulos, G., 2017. Collaborative Economy: Market Design and Basic Regulatory Principles. Intereconomics, 52(6), pp.340-345.

Puschmann, T. and Alt, R., 2016. Sharing economy. Business & Information Systems Engineering, 58(1), pp.93-99.

Sivramkrishna, S., 2016. In Search of Stability: Economics of Money, History of the Rupee. Routledge.