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Currency Fluctuations and International Trade Essay


Importing and Exporting

The terms import and export are derived from the word “port”, which denotes the transport of goods by a sea vessel. Countries that import goods from others around the globe often use ships to transport the goods and hence the derivation of the term from ‘port’. The first term, import, refers to the process of outsourcing commodities from another country and selling them in the neighborhood. On the other hand, export refers to selling locally produced goods and services to overseas regions. The two components of international trade have gained root in the contemporary world where countries are seeking to spark economic growth (Bovee & Thill, 2016). In an international trade setting, countries usually export goods that they produce in plenty and import the scarce ones. However, a country must balance the imports and exports to realize positive economic growth. If a country allows more imports relative to exports, it will realize negative growth since the move will result in the dumping of goods, a situation that is harmful to an economy (Colacito, Croce, Gavazzoni, & Ready, 2015).

Regional and bilateral trade agreements have greatly boosted international trade since they have led to business contracts that facilitate trade between countries. The agreements mostly seek to eliminate barriers to international trades, for instance, tariffs and other non-tariff hurdles (Khatami & Shajari, 2015). The removal of such barriers contributes to the liberalization of trade, thus leading to specialization whereby the countries involved concentrate on the production of a certain line of products different from those produced by other regions. Consequently, such countries must trade to obtain whatever goods they do not produce. The evolution of international trade has led to the emergence of traders who specialize in the import and export of goods.

The Number of Yens that One US Dollar can Buy

International trade involves the exchange of currency in which an exporter is paid using a foreign currency. On the other hand, the importer pays using the local currency (Khatami & Shajari, 2015). In the recent past, trade between Japan and the US has grown tremendously with the two countries importing and exporting technology among other goods. Trade between the countries is facilitated by bilateral agreements that alleviate any trade barriers. Japanese traders are paid using the US currency while the US exporters are paid in dollars. Although the US dollar has maintained strength over the Japanese Yen, fluctuations are usually evident. At times, the dollar attains much strength relative to the YEN, implying that one dollar can buy more Yen during such times. However, during other times, the dollar weakens against the Japanese Yen. In such times, the dollar can only buy fewer Yens.

Based on the currency fluctuations that are evident between the dollar and the Japanese Yen, it is important to analyze the performance of the dollar against the Japanese Yen. As of March 13, 2017, 08:40 UTC, one JPY was equivalent to 0.008722 USD. This value implies that at the stated date, one USD would buy 114.65 JPYs. In other words, a US exporter would receive 114.65JPY per dollar if he or she exported items on this particular day. The following illustration paints a clearer picture of the current exchange rates. Assuming that a US trader exports goods worth 1000 dollars to Japan. The trader would receive a sum of 114,650 JPYs (114.65JPY * 1000). Equally, a Japanese trader who exports goods worth 1000 JPYs would receive a sum of 8.722 USD.

Whether the Dollar is Strengthening or Growing Weaker

The exchange rates between the USD and the JPY have not been stable over the past year (Ramona, 2013). At times, the dollar has strengthened over the Yen while it has weakened against the Yen at other times. As of 1st March 2016, one USD was trading at 113.94 Yens. For the period between 1st and 22nd March 2016, the dollar weakened tremendously to reach 111.82 on the 22nd. However, towards the end of this month, the dollar strengthened against the Yen and traded at 113.33 on 29th March the same month. During the month of April, the dollar weakened further. As of 26th April, 1 USD would only buy 111.23 JPYs. Although the exchange rates of the two currencies fluctuated rapidly in the month of May, one dollar would buy 110.75 JPYs on 31st the same month. The dollar weakened drastically in the subsequent period. As of 28th June, 1 dollar would only buy 102.75 JPYs.

For the period between July and September, the exchange rates of the two currencies seemed stable with the highest and lowest amount of JPYs that one dollar could purchase being 106.13 and 100.28 respectively. However, the dollar strengthened sharply between October and December. As of 27th December, one dollar could buy 117.52 JPYs, the highest during the year in question. In January 2017, the dollar sharply weakened against the Yen. As of the 31st day of the month, one dollar would buy 112.72 JPYs. In the period thereafter, the exchange rates stabilized. As of 13th March when this paper was authored, the dollar would buy 114.65 JPYs. Based on the analysis of the exchange rates of the USD and the JPY for the past one year to the date of authoring this paper, it may be concluded that the trend in the exchange rates for the two currencies is not predictable (Hernandez, 2016).

Effect when the Dollar is Stronger than the Yen

As stated previously in this paper, exporters of goods are often compensated using the foreign currency. At times, the currency fluctuates after the sale but before the customer makes the payment (Offiong, Riman, & Akpan, 2016). In such a scenario, the exporter may either incur a loss or earn a profit depending on whether the currency depreciates or appreciates. In the case of a US exporter to Japan, the appreciation of the dollar against the Japanese Yen would have the effect of price increment in Japan for the exported products. Japanese traders will have to spend more Yens to buy the dollar in order to obtain the exported products. Consequently, they will have to adjust the prices of products upwards to realize their money plus some profits. Therefore, if the dollar strengthens against the Yen, Japanese customers will be negatively affected in terms of price hikes.

Effect on Prices when the Yen is stronger than the Dollar

Other than causing price hikes for exported products, currency fluctuations may produce positive results on the prices of the exported goods (Ritter, 2016). To illustrate the point, this section considers the effect that a weak dollar would have on the prices of goods exported to Japan. If the dollar weakens against the Yen, Japanese traders will spend a few Yens to buy the dollar during the importation process. The few Yens used to purchase the dollar will translate into cheaper prices of the imported goods and services. In such a situation, Japanese customers will pay less for goods and services.

References

Bovee, C., & Thill, J. (2016). Business in action. New York, NY: Pearson.

Colacito, R., Croce, M. M., Gavazzoni, F., & Ready, R. C. (2015). Currency risk factors in a recursive multi-country economy. Chapel Hill, NC: University of North Carolina.

Hernandez, R. (2016). Currency invoicing and the implications for prices. Monthly Labor Review, 1(1), 1-2.

Khatami, N., & Shajari, H. (2015). The study of effective currency rate as one of the important factors of international competitiveness and its fluctuations effect on Iran foreign trade. Academie Royale des Sciences, 4(2), 59-62.

Offiong, A., Riman, H. B., & Akpan, E. S. (2016). Foreign exchange fluctuations and commercial banks profitability in Nigeria. Foreign exchange, 7(18), 121-126.

Ramona, O. (2013). The US Dollar, the Euro, the Japanese Yen and the Chinese Yuan in the foreign exchange market – A comparative analysis. Studies in Business & Economics, 8(2), 102-107.

Ritter, M. (2016). . Web.

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IvyPanda. (2020, August 20). Currency Fluctuations and International Trade. Retrieved from https://ivypanda.com/essays/currency-fluctuations-and-international-trade/

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IvyPanda. "Currency Fluctuations and International Trade." August 20, 2020. https://ivypanda.com/essays/currency-fluctuations-and-international-trade/.

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IvyPanda. 2020. "Currency Fluctuations and International Trade." August 20, 2020. https://ivypanda.com/essays/currency-fluctuations-and-international-trade/.

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IvyPanda. (2020) 'Currency Fluctuations and International Trade'. 20 August.

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