Question

Please answer questions.

1. What factors drive exchange rates in the short-run, medium-run, and long-run?

2. What % of international trade is composed of services rather than goods?

Answer 1

1.

Exchange rates are affected by different factors that make the exchange rate to appreciate or depreciate and it is also specific to the time.  In the short run, the first factor is the interest rates and differences between the pair of nations. It affects the exchange rate. The second factor is the speculation about the performance of the economy and its driven investments. It immediately affects the exchange rate.  In the medium run, the balance of payment affects the exchange rate. A current account deficit leads to depreciation and current account surplus leads to the appreciation of the currency affecting the exchange rate. In the long run, it is the changing price level or inflation that affects the exchange rates. If inflation rises, then purchasing power of currency decreases. It leads to the change in exchange rates. Though, there are different factors, dominant in different periods, but there factors have an impact that have transmission effect. So, one factor can also impact for longer period as well.

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