Financing International Trade

Financing International Trade 

What are the factors influencing exchange rates? - demand and supply analysis

Video can be found here:

http://a2withkomilla.blogspot.com/2011/05/factors-determining-exchange-rates.html

What are the impacts of changes in exchange rates e.g. implications for competitiveness?

Appreciation of the £

• Raw materials become more cheaper [all imports become cheaper] 
• Consumers benefit from cheaper imports therefore better consumer welfare
• Business benefits from cheaper costs [imports] and suffer from expensive exports and raw materials
• Helps to control inflation as the average price of goods and services declines thanks to cheaper imports 
• Makes the deficit worse - current account deficit
• Due to declining exports the economy becomes less competitive given that 2 measures of competitiveness are current account and share of exports in the world market
• Economic growth can worsen through aggregate demand as X-M becomes smaller and sometimes even a negative number

Marshall Lerner Condition - as long as elasticities are greater than one therefore elastic. The J curve goes onto explain that the bettering of the current account cannot happen until it has got worse due to time lags, contracts with suppliers and consumer adjustment.

I haven’t written the effects of the depreciation of the £ as they are mere opposites

What are the costs and benefits of a monetary union - focusing on the eurozone?

Costs	Benefits
Exports are expensive which is not good for countries where traditionally exports were cheaper	Security for the countries in it - Greece example
GDP per capita is still 70% of USA it is not catching up	Macroeconomic stability for those countries involved
Performance of countries is diverging because of the ‘one size fits all’ approach	Financial stability - strong euro
UK inflation is too high so theoretically a monetary union with the EU is not possible	16m new jobs created
Difference in housing market and economic structure	Average budget deficit has fallen by 0.6% of GDP
The UK is not as flexible as the other countries like Germany at recovering from economic shock	Free trade and movement of labour makes the countries an attractive destination for FDI
The EU actually have a deflation (-0.5%) which is not something you would want to be ties down to.	European standards of living have increased drastically
Loss of control and macroeconomic policy	Exchange rate stability
Menu/Transitional costs	Promotes perfect knowledge and transparency.
Loss of national heritage