Question

Is it trade deficit or trade surplus that contributes more to economic growth? Why?

What are the factors that increase and decrease the demand for a foreign currency?

What are the impacts of currency devaluation and revaluation on international trade?

What is currency war? How does it affect trade between countries?

Answer 1

Solution i1). iA itrade isurplus irefers ito ian ieconomic imeasure iwhich ireflects ipositive ibalance iof itrade iwhere ia icountry's iexports iexceed iits iimports. iIt idefines inet iinflow iof idomestic icurrency ifrom iforeign imarkets. iA itrade isurplus ishows ithat iwhen ithere iis ihigh idemand ifor ia icountry’s igoods iin ithe iglobal imarket iwhich ipush ithe iprice iof ithose igoods ihigher iand ileads ito ia idirect istrengthening iof ithe idomestic icurrency iof ia icountry. iIt icontributes iin icreating imore iemployment iand ieconomic igrowth ibut iit imay ilead ito ihigher iprices iand iinterest irates iin ia icountry's ieconomy. iIt ihelps ito istrengthen ia icountry’s icurrency irelative ito iother icurrencies iwhich iaffects icurrency iexchange irates.

A itrade ideficit iis ia iopposite ito itrade isurplus. iIt ishows imeasurement ithat iwhen ia icountry iimports imore ithan iit iexports. iIn isimple iwords, iwhen ia icountry iis ibuying imore igoods iand iservices iinstead iof iselling. iFurther, iit ican ibe ia isign iof ia istrong ieconomy iand iin isome icertain icases, iit ican ilead ito istronger ieconomic igrowth ifor ithe ideficit-running icountry iin ithe ifuture. iTherefore, iforeign ilending iand iinvestment iwhich ishow itrade ideficit iin ibalance iof itrade ican ibe ia isource iof ilong-term ieconomic igrowth. iIn i1800s ithe iUS iborrowed imoney ior iforeign iinvestment iand iused imoney ieffeciently ifor iproductivity igrowth. iThis iborrowings iwas iused ito idevelopment iin ithe irailroads iand iother ipublic iinfrastructure iwhich ihelped iin ithe igrowth iof iU.S.economy. i

Solution i2). i iThe ifactors ithat iincrease iand idecrease ithe idemand ifor ia iforeign icurrency iare:

Demand iin ithe iForeign igoods i& iservices: iThe idemand ifor ithe iforeign icurrency iappears ifrom ithe ineed ito ibuy igoods iand iservices iabroad. iThe idemand ifor ithe icurrency iof iany icountry iin ithe iforeign iexchange imarket iindicates ithat ithere iis ia idemand iof iforeigners ifor igoods iand iservices iof ithis icountry. iBuyers iwho iwant ito ibuy iforeign igoods, iwill ineed ia icurrency iof ithe iselling icountry iin iexchange ifor ilocal icurrency iat ithe iprice iprevailing iin ithe imarket, ithat iis iat ithe iexchange irate. iThe idemand ifor icurrency iof ithe iseller iof igoods iwill idepend ion ithe iprice iof iforeign icurrency ii.e., ithe iexchange irate iwhereas isupply iof icurrency iby ithe iselling icountry iappears idue ito ithe inecessity ito ibuy ithe igoods iin ithe ipurchasing icountry iof iits iproducts.

Growth iIn iNational iIncome iof ia icountry: iIt ilead ito iincrease iin idemand ifor iimported igoods idue ito iwhich iit igenerates idemand ifor ithe icurrency iof ithe iimporting icountry iand ithe itendency ito ithe idepreciation iof ithe inational icurrency. iFurther, ithe irise iin iexports iassociated iwith ithe igrowth iof inational iincome iin ithe iother icountry iwhich igenerates ian iupward itendency iof ithe inational icurrency iof ithe iexporting icountry.

Balance iof iPayment iof ia icountry: iIt iaffects ithe iexchange irate iof ia icountry iwhere ithe ipassive ibalance iworsens ithe isituation iin ithe iworld imarket iof ia iparticular icurrency, ias ithe idemand ifor iforeign icurrency iexceeds iits ioffer, iand ithe iactive ibalance iimproves, ias ithe isupply iof iforeign icurrency iexceeds ithe idemand ifor iit.

Solution i3). iThe iimpacts iof icurrency idevaluation iand irevaluation ion iinternational itrade iare:

Impact iof iCurrency iDevaluation i- i

• Another ieffect iof idevaluation iis ithat iit imay ilead ito iconcerns iby ineighboring icountries ito idevalue itheir icurrencies itoo iin ithe irace ito ithe ibottom ihence icausing ifinancial iinstability iin ithe ibordering imarkets.
• Devaluation ican ialso icause ipsychological idamage ito ithe iforeign iinvestors. iThis iis ibecause ia iweaker icurrency imay ibe iviewed ias ian iindication iof ieconomic iweakness ihence iscaring iaway iforeign iinvestors.
• An iincrease iin idemand ifor iexported igoods ican ilead ito iinflation. iWhen ithis ihappens, ithe igovernment ican iraise iinterest irates ibut iat ia icost isince iit iwill islow ithe icounty’s ieconomy.

Impact iof iCurrency iRevaluation i- i

• The iimpact iof icurrency irevaluation ican ibe ieither ihigh iinflation ior ilow iinflation. iWhen iexporting icountry’s icurrency irevaluates, idemand ifor iits igoods iwill idecrease ithat ilead ito ihigh iinflation. iCheap iimports ifrom iAsian icountries ikept iinflation iin ithe iU.S. iin icheck, ibut irevaluation iof iAsian icurrencies iincreased ithe irate iof iinflation, ias iimports ibecame imore iexpensive. iConversely, iif ithe iimporting icountry’s icurrency irevaluates iagainst ithe iexporting icountry’s icurrency, ilow iinflation imay ioccur ibecause iof iavailability iof icheap iimports.
• The i iimpact iof icurrency irevaluation icause itrade iimbalances. iAccording ito iChina’s icase, irevaluation iof ithe iRenminbi iled ito ia idecline iin idemand ifor iexports iof ichina. iThe idecline iis ibecause iformerly icheap igoods ibecome iexpensive iafter irevaluation iof ithe iexporting icountry’s icurrency. iBesides ithis, ithe irevaluation iof iRenminbi icould ilead ito ithe ipreference iof iproducts imanufactured iin iother icountries.

Solution i4). i i

Currency iWar i- iIt irefers ito ia isituation iwhere icountries iseek ito ideliberately idepreciate ithe ivalue iof itheir idomestic icurrencies iin iorder ito istimulate itheir ieconomies. iIt iinvolves itaking imeasures ito istrategically ilower ithe ipurchasing ipower iof ia ination's iown icurrency. iIn iCurrency iWar, icountries iengage idue ito igain ia icomparative iadvantage iin iinternational itrade. iWhen icountries idevalue itheir icurrencies ithat ilead ito imake itheir iexports iless iexpensive iin iforeign imarkets. iFurther, ithe ibusinesses iexport imore ito ibecome imore iprofitable iand icreation iof inew ijobs iopportunities. iThe iconsequence iof ithis ithat ithe icountry itakes ibenefit iof istronger ieconomic igrowth.

Currency iWar iaffect itrade ibetween itwo icountries ithrough isome ipoints ithat ihave ibeen imentioned ibelow:

• A icurrency iwar ilead ito igreater iprotectionism iand ithe ierecting iof itrade ibarriers iwhich iprevent ifrom iglobal itrade ii.e., iamong icountries.
• Due ito icompetitive idevaluation, iit imay icause ian iincrease iin icurrency ivolatility ithat ilead ito ihigher ihedging icosts ifor icompanies iand ipossibly ideter iforeign iinvestment.
• Currency idevaluation iaffects ilower iproductivity iin ithe ilong-term, isince iimports iof icapital iequipment iand imachinery ibecome itoo iexpensive ifor ilocal ibusinesses due to which it will be impacted on the international trade businesses