Introduction
In finance, an exchange rate can be defined as the value of one country’s currency in terms of another country’s currency. Thus, the rate at which two currencies can be exchanged for the other. We cannot ignore the importance of international trade as all countries have limited resources, which may limit their production capability.
Exchange rate and international trade
Exchange Rates are vital for all countries as they determine the level of exports and imports. When a domestic currency is to depreciate with respect to a foreign currency, then the imported goods would be expensive in the domestic market and vice versa.
Thus, the domestic companies would realize that the competitor’s goods become less attractive to the customers but if the domestic currency appreciates with respect to the foreign currency then this means that the imported goods would be cheaper and more attractive to the customers (Ehrhardt & Brigham 698).
The downside is that if the country has a strong currency then this means that the countries goods become more expensive in the international market, and without saying, it loses its competitiveness. This could be the reason why China does not let its Yuan appreciate despite pressure from the US.
Many are involved with international trade, thus the exchange rates can have a significant impact on their activities determining the business profitability. If for example, the value of the UK currency has risen against the US dollar, and a UK company conducts most of its business in the US, the company’s profit will drop after it converts its dollar revenues into pounds (Clark 24). The issue of exchange rate for companies that trade in other countries is a crucial issue in the consideration of the planning, controlling and performance.
A small movement in the exchange rate world affects the revenues, profits and costs incurred in a business. Example a depreciation of the euro against the dollar will profit a business if it were selling its product in the US.
However, if there is a fall in the exchange rate with a country like Japan a significant loss will occur if the company buys its goods from Japan and then sell them to the US. Thus, the overall effect will all depend with the rate and proportion that is linked to the different countries that the company trades with (Ehrhardt & Brigham 699).
Exchange rates, affects the prices of the same commodities this means that the commodities’ prices changes when bought in different countries as the buyer in country A must enter the nation’s currency B. If I were interested in buying a product in China, I would have to change my monies into Yuan currency. Thus, the constant shift in the supply and demand for the foreign currencies changes the prices of the currencies.
There are many factors that increase the number on demand and supply on a foreign product this may include; if the foreign products are at a lower price than the domestic goods then without doubt, the customers will increase the demand for the import. Others include demand for imports, exports, relative interest rates, investment opportunities, depreciation/appreciation of the exchange rate (Clark 32).
Conclusion
Conclusively, changes in the international value of currencies and exchange rates can profoundly affect the international demand and supply and the securities that should be equilibrium in the international marketplace. The differences in the currencies can significantly affect our way of living and trading with other countries. Therefore, we cannot ignore the importance of acknowledging other countries’ economy or their currencies crisis as this can affect others and this country and of course our way of living.
Work Cited
Clark, B. A. New look at Exchange Rate Volatility and Trade Flows. New York: John Wiley & Sons, 2004. Print.
Ehrhardt, C & Brigham, E. Financial Management Theory and Practice. London: Oxford Press, 2010. Print.