Chapter 18 International Trade

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ECONOMICSECONOMICS

Year 11Year 11

Chapter 18Chapter 18

International Trade & Exchange RateInternational Trade & Exchange Rate


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Malaysia Imports & ExportsMalaysia Imports & Exports


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IMPORTSIMPORTS


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ExportsExports


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KEY THINGS TO CONSIDER INKEY THINGS TO CONSIDER IN

INTERNATIONAL TRADEINTERNATIONAL TRADE

WHY DO WE TRADE WITH OTHER WHY DO WE TRADE WITH OTHER

COUNTRIES?COUNTRIES? WHAT DO WE EXPORT (SELL ) ABROAD)? WHAT DO WE EXPORT (SELL ) ABROAD)?

WHAT DO WE IMPORT (BUY) FROM WHAT DO WE IMPORT (BUY) FROM

ABROAD?ABROAD? WHAT IS THE BALANCE OF PAYMENTS? WHAT IS THE BALANCE OF PAYMENTS?

WHY DO EXCHANGE RATES MATTER? WHY DO EXCHANGE RATES MATTER?


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ExportsExportsare the movement of goods orare the movement of goods or

commodities out of the country.commodities out of the country. It is representedIt is represented

by a flow of money back into the country asby a flow of money back into the country asrevenuerevenue

ImportsImportsare the movement of goods or commoditiesare the movement of goods or commodities

into the country.into the country. Represented by a flow of moneyRepresented by a flow of moneyleaving the countryleaving the country


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Malaysia top biggest import andMalaysia top biggest import andexport marketexport market


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Visible TradeVisible Trade

Visible tradeinvolves tradingofgoods which canbeVisible tradeinvolves tradingofgoods which canbe

seen,seen, touched and weighed. Examplesinclude tradetouched and weighed. Examplesinclude trade

ingoodssuch as Oil, machinery,food,clothesetc.ingoodssuch as Oil, machinery,food,clothesetc.

Visible Trade consists ofVisible Trade consists of Visible exports:Visible exports: Sellingoftangiblegoods which canSellingoftangiblegoods which can

be touched and weighed toother countries.be touched and weighed toother countries.

Visible imports:Visible imports: Buyingoftangiblegoods which canBuyingoftangiblegoods which can

be touched and weighed from other countries.be touched and weighed from other countries.


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Invisible tradeInvisible trade

Invisible trade involves the import and export ofInvisible trade involves the import and export of

services rather than goods.services rather than goods. Example includeExample includeservices such as insurance, banking, tourism,services such as insurance, banking, tourism,

education.education.

If a UK student comes to Singapore to study, itIf a UK student comes to Singapore to study, itwould be invisible export for Singapore as it iswould be invisible export for Singapore as it is

earning foreign exchange by providingearning foreign exchange by providing

educational services.educational services.If a Singapore citizen travels to UK for aIf a Singapore citizen travels to UK for aholiday. It will be invisible import for Singaporeholiday. It will be invisible import for Singapore

and invisible export for UK.and invisible export for UK.


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Balance of invisible tradeBalance of invisible trade

It is the difference between the value of invisibleIt is the difference between the value of invisible

exports and value of invisible imports of aexports and value of invisible imports of acountry.country.

Doexercise 2 Page 335


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Worlds topWorlds top

importersimporters


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WHY DO COUNTRIES TRADE WITHWHY DO COUNTRIES TRADE WITH

EACH OTHER?EACH OTHER?

To obtain goods that they cannot produce themselvesTo obtain goods that they cannot produce themselves

TTo increase choice for their consumerso increase choice for their consumers

To obtains goods at a cheaper price than what they canTo obtains goods at a cheaper price than what they canproduce themselvesproduce themselves

To make more revenues and profits. It an extra place inTo make more revenues and profits. It an extra place inwhich to sell their goodswhich to sell their goods

Countries specialise in the production of goods andCountries specialise in the production of goods andservices at which they are better.services at which they are better.

To exploit a comparative or absolute advantage.To exploit a comparative or absolute advantage.


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COMPARATIVE ADVANTAGECOMPARATIVE ADVANTAGE

Where one country can produce a good at aWhere one country can produce a good at a

relatively cheaper cost in terms of other goodsrelatively cheaper cost in terms of other goodsthan another producer.than another producer.

ABSOLUTE ADVANTAGEABSOLUTE ADVANTAGE

Where one producer is better at producing aWhere one producer is better at producing a

product than another producer.product than another producer.


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UK AND COMPARATIVE ADVANTAGEUK AND COMPARATIVE ADVANTAGE

In recent years the UKhad a comparative advantage inIn recent years the UKhad a comparative advantage ina number of manufacturing industries such as textilesa number of manufacturing industries such as textilesor motorcycles.or motorcycles.

This was because the UK

had lots of natural resourcesThis was because the UK

had lots of natural resourcesand raw materials, trained workers and lots of relevantand raw materials, trained workers and lots of relevantmachinery.machinery.

However, now this advantage has been lost to otherHowever, now this advantage has been lost to other

areas of the world particularly Asia. They haveareas of the world particularly Asia. They haveextremely cheap labour, new technology and lowextremely cheap labour, new technology and lowtransport costs.transport costs.


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Balance of PaymentBalance of Payment

Meaning:Meaning:

A record of all transactions made between oneA record of all transactions made between oneparticular country and all other countriesparticular country and all other countries duringduring

aa specified period of time.specified period of time.

BOPBOP compares the dollar difference of the amount ofcompares the dollar difference of the amount ofexports and imports, including all financial exports andexports and imports, including all financial exports and

imports. A negative balance of payments means thatimports. A negative balance of payments means thatmore money is flowing out of the country than comingmore money is flowing out of the country than comingin, and vice versain, and vice versa


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Balance of payments may be used as an indicator ofBalance of payments may be used as an indicator ofeconomic and politicaleconomic and political stability. For example, if astability. For example, if a

country hascountry has a consistently positive BOP, thisa consistently positive BOP, this couldcouldmean thatmean that there is significant foreign investment withinthere is significant foreign investment withinthat country. It may alsothat country. It may also mean that the country doesmean that the country doesnot export much of its currency.not export much of its currency.

This is just another economic indicator of a country'sThis is just another economic indicator of a country'srelative value and, along with all other indicators,relative value and, along with all other indicators,should be used with caution. Theshould be used with caution. The BOP includesBOP includesthethe trade balance,trade balance, foreign investments and investmentsforeign investments and investmentsby foreigners.by foreigners.


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Balance of PaymentsBalance of Payments

RememberRemember::It shows all the payments and receipts betweenIt shows all the payments and receipts betweenone country and all the other countries itone country and all the other countries it

trades with.trades with.

Balance of Payment is classified into threeBalance of Payment is classified into three

categories. These are:categories. These are:

1.1. The Current AccountThe Current Account

2.2. The Capital AccountThe Capital Account

3.3. The Financial AccountThe Financial Account


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The current accountThe current accountIt includesIt includes

All the visible and invisible trade of the countryAll the visible and invisible trade of the country

Wages received by countries citizens workingWages received by countries citizens workingoutside in other countries or paid to foreignoutside in other countries or paid to foreign

workers working in the country.workers working in the country.

Interest payments, profits and dividends onInterest payments, profits and dividends on

sharesshares

Taxes received and paid by the governmentTaxes received and paid by the governmentfrom foreign sources.from foreign sources.


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The Capital accountThe Capital account

It includes flow of money in and out of theIt includes flow of money in and out of the

country because of:country because of:

Change of ownership of fixed assetsChange of ownership of fixed assets

Sale of fixed assetsSale of fixed assets

$$ taken out of a country by residents leaving to$$ taken out of a country by residents leaving tostay abroad arestay abroad are debitsdebitswhile $$ brought in bywhile $$ brought in bymigrants aremigrants are creditscredits


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The financial accountThe financial account

It records the flow of money in and out of aIt records the flow of money in and out of a

country because of:country because of:

Investment in capital, shares and loans.Investment in capital, shares and loans.

Direct inward investmentDirect inward investment Ex. From foreignEx. From foreign

manufacturers eg xFabmanufacturers eg xFab Portfolio investments eg purchase of sharesPortfolio investments eg purchase of shares

from overseas investorsfrom overseas investors


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BalanceofPaymentcanbe favourableor unfavourableBalanceofPaymentcanbe favourableor unfavourable

(deficit).(deficit).

The purpose of the balance of payments isThe purpose of the balance of payments is

to record of all financial dealings withto record of all financial dealings with

foreignersforeigners

CURRENT ACCOUNTCURRENT ACCOUNT

The part of the balance of payments accountsThe part of the balance of payments accountswhere the value of exports and imports iswhere the value of exports and imports is

recorded.recorded.


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WHAT THE CURRENT ACCOUNT MIGHT LOOK LIKEWHAT THE CURRENT ACCOUNT MIGHT LOOK LIKE

UKs CURRENT ACCOUNT 2002UKs CURRENT ACCOUNT 2002((billionbillion))

VISIBLE EXPORTSVISIBLE EXPORTS 700700VISIBLE IMPORTSVISIBLE IMPORTS 800800

BALANCE OF TRADEBALANCE OF TRADE -- 100100

INVISIBLE EXPORTSINVISIBLE EXPORTS 300300

INVISIBLE IMPORTSINVISIBLE IMPORTS 100100

INVISIBLE BALANCEINVISIBLE BALANCE + 200+ 200

TOTAL EXPORTSTOTAL EXPORTS 10001000TOTAL IMPORTSTOTAL IMPORTS 900900

CURRENT BALANCECURRENT BALANCE +100+100

In thiscase the UK isimporting moregoods (visibles) thanit isIn thiscase the UK isimporting moregoods (visibles) thanit is

exporting. However,it isexporting moreservices (invisibles)exporting. However,it isexporting moreservices (invisibles)thanit isimporting. Overall, the positiveinvisiblebalancethanit isimporting. Overall, the positiveinvisiblebalance

outweighs thenegativebalanceoftrade and the UK has aoutweighs thenegativebalanceoftrade and the UK has a

healthy, positivecurrent balance.healthy, positivecurrent balance.


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WHY COULD THE UKHAVE A DEFICITWHY COULD THE UKHAVE A DEFICIT

((--) ON ITS GOODS BALANCE?) ON ITS GOODS BALANCE?

In this case the UK is importing more goodsIn this case the UK is importing more goods

(visibles) than it is exporting. However, it is(visibles) than it is exporting. However, it is

exporting more services (invisibles) than it isexporting more services (invisibles) than it is

importing. Overall, the positive invisibleimporting. Overall, the positive invisible

balance outweighs the negative balance ofbalance outweighs the negative balance of

trade and the UK has a healthy, positivetrade and the UK has a healthy, positive

current balance.current balance.


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Exchange RateExchange Rate

Exchange rate:Exchange rate: -- the price at which one currency isthe price at which one currency is

bought and sold for anotherbought and sold for another

e.g.e.g.

1 = $1.1 = $1.6038060380 UKand USAUKand USA1 =1 = 133.14133.14 yen UKand Japanyen UKand Japan

A 1 coin can be sold to buy $1.A 1 coin can be sold to buy $1.66 oror 133133 yenyen

In order to obtain a 1 coin an American would haveIn order to obtain a 1 coin an American would haveto offer $1.to offer $1.66 and a Japanese personand a Japanese person 133133 yen.yen.


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Tuesday, March 29, 2011

11 1.59571.5957 1.023951.02395 1.40661.4066 1.022311.02231

0.6266530.626653 11 0.6416610.641661 0.381450.38145 0.6406350.640635

0.976610.97661 1.558451.55845 11 1.373691.37369 0.9984010.998401

0.7109340.710934 1.134491.13449 0.7272610.727261 11 0.7257970.725797

0.978170.97817 1.560941.56094 1.00161.0016 137589137589 11


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Foreign Currency Units

[=1 Malaysian ringgit] Buying Selling

1 Australian Dollar AUD 3.1149 3.1178

1 Brunei Dollar BND 2.3953 2.3979

1 Canadian Dollar CAD 3.1051 3.109

100 Cambodian Riel KHR 0.0747 0.0756

1 Chinese Renminbi CNY 0.4613 0.4617

1 EURO EUR 4.2659 4.2693

100 Hong Kong Dollar HKD 38.8341 38.8623

100 Indonesian Rupiah IDR 0.0347 0.0348

100 Japanese Yen JPY 3.6694 3.6727

100 Korean Won KRW 0.2729 0.2732

100 Phillippine Peso PHP 6.9415 6.9621

100 Saudi Arabian Riyal SAR 80.6916 80.7665

1 Singapore Dollar SGD 2.398 2.4005

1 Swiss Franc CHF 3.2857 3.289

100 Taiwanese New Dollar TWD 10.2628 10.3045

100 Thai Baht THB 9.9753 9.9983

1 U.K. Pound GBP 4.843 4.8474

1 U.S. Dollar USD 3.0265 3.0285


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CHANGES IN THE VALUE OF THE CHANGES IN THE VALUE OF THE

Thevalueofthe changes daily against otherThevalueofthe changes daily against other

currencies. It could becomestronger or it couldcurrencies. It could becomestronger or it could

become weakerbecome weaker

VALUE YESTERDAYVALUE YESTERDAY VALUE TODAYVALUE TODAY EFFECTEFFECT

1 = $1.51 = $1.5 1 = $1.61 = $1.6 stronger or increased invaluestronger or increased invalue

1 = $1.51 = $1.5 1 = $1.41 = $1.4 weaker or falleninvalue weaker or falleninvalue

1 = 200 yen1 = 200 yen 1 = 220 yen1 = 220 yen stronger or increased invalue stronger or increased invalue1 = 200 yen1 = 200 yen 1 = 180 yen1 = 180 yen weaker or falleninvalueweaker or falleninvalue


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WHY DO EXCHANGERATES MATTER?WHY DO EXCHANGERATES MATTER?1. They influence the price of imports1. They influence the price of imports

2. They influence the price of exports2. They influence the price of exports

3. They effect tourism.3. They effect tourism. ss in exchangein exchange rates influencerates influence

how much money you receive when youhow much money you receive when you your currencyyour currency

4. They can effect firms profits4. They can effect firms profits

5. They can have an effect upon unemployment, inflation,5. They can have an effect upon unemployment, inflation,economic growth and the balance of payments.economic growth and the balance of payments.


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ACTIONACTION

a. How much currency did you receive on youra. How much currency did you receive on your

last visit abroad?last visit abroad?

b. How did you work out the amount you wouldb. How did you work out the amount you would

receive?receive?

c. How about when you changed it back into c. How about when you changed it back into


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Determines the exchange rate of aDetermines the exchange rate of a

currencycurrency

Demand for a currency: People, firms &Demand for a currency: People, firms &

Governments buy the countrys currency to payGovernments buy the countrys currency to payfor their imports or to invest in the countrysfor their imports or to invest in the countrys

companiescompanies

Supply of the currency: Using the countrysSupply of the currency: Using the countrys

currency to buy foreign currencies to pay forcurrency to buy foreign currencies to pay for

imports and overseas investmentimports and overseas investment


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WHAT HAPPENS WHEN THE CHANGES IN VALUE?WHAT HAPPENS WHEN THE CHANGES IN VALUE?

EXAMPLE 1: EXPORTING (SELLING ABROAD)EXAMPLE 1: EXPORTING (SELLING ABROAD)

SELLING A TABLE TO AMERICA. THE TABLE COSTS 100SELLING A TABLE TO AMERICA. THE TABLE COSTS 100 YESTERDAY: 1 = $1.5YESTERDAY: 1 = $1.5

Cost to American 100 * 1.5 = $150Cost to American 100 * 1.5 = $150

TODAY: 1 = $ 2TODAY: 1 = $ 2 has got stronger has got stronger

Cost to American 100 * 2 =$200Cost to American 100 * 2 =$200The strong has increased the price to foreigners. The UKbusinessThe strong has increased the price to foreigners. The UKbusinessmay struggle to sell the tablemay struggle to sell the table

TOMORROWTOMORROW 1 = $11 = $1 has got weaker has got weaker Cost to American 100 * 1 = $100Cost to American 100 * 1 = $100 The weak has reduced the cost to foreigners. The UKbusinessThe weak has reduced the cost to foreigners. The UKbusiness

should find it easier to sell the tableshould find it easier to sell the table

In each of the above examples the UK firm still receives 100In each of the above examples the UK firm still receives 100


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CONCLUSIONCONCLUSION

A strong or an increase in the value of the makes itA strong or an increase in the value of the makes itmore difficult for exporters to sell their goods abroad.more difficult for exporters to sell their goods abroad.This is because foreigners have to pay more in order toThis is because foreigners have to pay more in order tobuy our goods.buy our goods.

The UK

exporter could lower the price but then willThe UK

exporter could lower the price but then willlose some profit and may make a loss.lose some profit and may make a loss.

Therefore a strong can cause problems for businessesTherefore a strong can cause problems for businesseswhich export in foreign markets. It could causewhich export in foreign markets. It could cause

-- unemploymentunemployment-- slower economic growthslower economic growth-- a deficit on the balance of paymentsa deficit on the balance of payments


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EXAMPLE 2: IMPORTING (BUYING FROM ABROAD)EXAMPLE 2: IMPORTING (BUYING FROM ABROAD)

BUYING A TABLE FROM AMERICA. THE TABLE COSTSBUYING A TABLE FROM AMERICA. THE TABLE COSTS$100$100

YESTERDAY: 1 = $1.5YESTERDAY: 1 = $1.5 Cost to Britain $100 / 1.5 = 67Cost to Britain $100 / 1.5 = 67 TODAY: 1 = $ 2TODAY: 1 = $ 2 has got stronger has got stronger

Cost to Britain $100 / 2 =50Cost to Britain $100 / 2 =50

The strong has reduced the cost to UK importers. The UKpeopleThe strong has reduced the cost to UK importers. The UKpeoplemay be more likely to import the table.may be more likely to import the table.

TOMORROW: 1 = $1TOMORROW: 1 = $1 has got weaker has got weaker Cost to Britain $100 / 1 = 100Cost to Britain $100 / 1 = 100 The weak has increased the cost to UK importers. The UKpeopleThe weak has increased the cost to UK importers. The UKpeople

are less likely to import the table.are less likely to import the table.

In each of the above examples the US firm still receives $100In each of the above examples the US firm still receives $100


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CONCLUSIONCONCLUSION

A strong or an increase in the value of the makes itA strong or an increase in the value of the makes itcheaper to import raw materials or goods from abroad.cheaper to import raw materials or goods from abroad.

? Good for businesses who need raw materials? Good for businesses who need raw materials? Bad for UKbusinesses who compete against foreign? Bad for UKbusinesses who compete against foreign

importsimports May reduce cost push inflation May reduce cost push inflation A weak or a fall in the value of the makes it moreA weak or a fall in the value of the makes it more

expensive to import raw materials or other goods fromexpensive to import raw materials or other goods fromabroad.abroad.

-- Bad for businesses who import raw materialsBad for businesses who import raw materials-- Good for UKbusinesses who compete againstGood for UKbusinesses who compete againstforeign importsforeign imports May cause cost push inflation May cause cost push inflation


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FIXED EXCHANGE RATE SYSTEMFIXED EXCHANGE RATE SYSTEM

An exchange rate that is kept within a certainAn exchange rate that is kept within a certain

value. It is prevented from changing too muchvalue. It is prevented from changing too much e.g. the may have to stay within a certain valuee.g. the may have to stay within a certain value

against the $against the $

1 = no less than $1.4 but no more than $1.61 = no less than $1.4 but no more than $1.6 WHY?WHY?

? Avoid wide ranging changes in the value of the? Avoid wide ranging changes in the value of the

? Firms can plan ahead with confidence? Firms can plan ahead with confidence? Exporters shouldnt suffer too much? Exporters shouldnt suffer too much? Should encourage trade? Should encourage trade


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HOW DOES IT WORKHOW DOES IT WORK??If the is falling in value then the Government willIf the is falling in value then the Government will

intervene and buy from foreign countries thisintervene and buy from foreign countries thiswill increase the value of the will increase the value of the

If the is increasing in value then the Government willIf the is increasing in value then the Government willintervene and sell at a lower price to foreign countriesintervene and sell at a lower price to foreign countries

the will fall in value the will fall in value

A movable or adjustable peg system is a system offixedexchange rates, but with a provision for the devaluation

of a currency. For example, between 1994 and 2005,the Chinese yuan renminbi (RMB) was pegged to theUnited States dollar at RMB 8.2768 to $1


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In 1998In 1998 Tun Dr Mahathir Mohamad hasTun Dr Mahathir Mohamad hasproposed that the ringgit should once again beproposed that the ringgit should once again be

pegged against the US dollar to deal with thepegged against the US dollar to deal with thecurrent economic uncertainties.current economic uncertainties.

The former prime minister said it would beThe former prime minister said it would bedifficult for the country to plan its economydifficult for the country to plan its economy

with a fluctuating exchange rate. "Thewith a fluctuating exchange rate. "Thegovernment should consider taking control ofgovernment should consider taking control ofthe currency by pegging the ringgit against thethe currency by pegging the ringgit against the

US dollar," he said after attending a seminar onUS dollar," he said after attending a seminar ondeveloping strategic planning for higherdeveloping strategic planning for highereducation here yesterday.education here yesterday.


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The ReasonsThe Reasons Between 1995 and 1997, the ringgit was trading as aBetween 1995 and 1997, the ringgit was trading as a free floatfree float

currency at around 2.50 to thecurrency at around 2.50 to the U.S. dollarU.S. dollar,, before dipping tobefore dipping tounder 3.80 to the dollar by the end of 1997,following theunder 3.80 to the dollar by the end of 1997,following the year'syear'sEast Asian financial crisisEast Asian financial crisis..

For the first half of 1998, the currency fluctuated between 3.80For the first half of 1998, the currency fluctuated between 3.80and 4.40 to the dollar,beforeand 4.40 to the dollar,before Bank Negara MalaysiaBank Negara Malaysia peggedpegged thetheringgit to the US dollar in September 1998, maintaining its 3.80ringgit to the US dollar in September 1998, maintaining its 3.80

to the dollar value for almost seven years, while remainingto the dollar value for almost seven years, while remainingfloated against other currencies.floated against other currencies.

The ringgit lost 50% of its value against the US dollar betweenThe ringgit lost 50% of its value against the US dollar between1997 and 1998, and suffered general1997 and 1998, and suffered general depreciationdepreciation against otheragainst othercurrencies between December 2001 and January 2005. As ofcurrencies between December 2001 and January 2005. As ofSeptember 4, 2008, the ringgit has yet to regain its value circaSeptember 4, 2008, the ringgit has yet to regain its value circa2001 against the2001 against the Singapore dollarSingapore dollar (SGD) (2.07 to 2.40 to the(SGD) (2.07 to 2.40 to theMYR),theMYR),the EuroEuro (EUR) (3.40 to 4.97 to the MYR), the(EUR) (3.40 to 4.97 to the MYR), theAustralianAustraliandollardollar (AUD) (1.98 to 2.80 to the MYR, and the(AUD) (1.98 to 2.80 to the MYR, and the British poundBritish pound(GBP) (5.42 to 6.10 to the MYR.(GBP) (5.42 to 6.10 to the MYR.


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FLOATING EXCHANGE RATEFLOATING EXCHANGE RATEThe can change in value freely against the $. It could end up atThe can change in value freely against the $. It could end up at

any exchange rate. the government will not intervene toany exchange rate. the government will not intervene toinfluence its rate.influence its rate.

A FALL IN THE VALUE OF THE A FALL IN THE VALUE OF THE

This could happen in 2 waysThis could happen in 2 ways

a) DEVALUATIONa) DEVALUATION This is when the government deliberately engineers a fall in theThis is when the government deliberately engineers a fall in the

. It may do this by selling at lower prices in order to reduce. It may do this by selling at lower prices in order to reducetheir value. It might do this to make UK firms more competitive.their value. It might do this to make UK firms more competitive.

b) DEPRECIATIONb) DEPRECIATION

This is when the falls naturally to a lower level. There is noThis is when the falls naturally to a lower level. There is noinfluence from the government.influence from the government.

ACTIONACTION

Why might a government want to have a lower exchange rate?Why might a government want to have a lower exchange rate?


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What factors determine the foreign exchange rate ofWhat factors determine the foreign exchange rate of

a currencya currency

1)1)TradeTrade (exports/imports)(exports/imports)

2)2) Interest RatesInterest Rates -- increasing the interest rate causes 'hot'increasing the interest rate causes 'hot'money to flow into the economy, therefore the demand themoney to flow into the economy, therefore the demand thedomestic currency increases, therefore the currency appreciates.domestic currency increases, therefore the currency appreciates.

3)3) InflationInflation -- relative inflation rates affects the economy'srelative inflation rates affects the economy'sinternational competitiveness , so if the economy is experiencinginternational competitiveness , so if the economy is experiencinghigher inflation rate than its trading partners to such a situationhigher inflation rate than its trading partners to such a situationthat it is less competitive than they are, than there shall be lessthat it is less competitive than they are, than there shall be lessdemand for the domestic currency as foreign markets willdemand for the domestic currency as foreign markets willdemand less goods and services from you, hence the demand fordemand less goods and services from you, hence the demand forthe domestic currency shall drop.the domestic currency shall drop.


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4)4) SpeculationSpeculation -- simply a believe in the path thesimply a believe in the path the

currency, shall cause speculators to adjust theircurrency, shall cause speculators to adjust theirtrades in light of this believe.trades in light of this believe.

e.g. if currency speculators believe that ane.g. if currency speculators believe that aneconomy is overheating and soon there shall beeconomy is overheating and soon there shall be

a devaluation, then they will get out of thea devaluation, then they will get out of thecurrency causing there to be more supply thancurrency causing there to be more supply than

demand on the forex for that currency, hence itdemand on the forex for that currency, hence itdepreciates.depreciates.

Documents

Chapter 18 International Trade