International Trade: Export and Import . Forex (1.3, 1.6,1.5.4)

International Trade: Export and Import. Forex (1.3, 1.6,1.5.4)

 

Explain why exports and imports are the main characteristics of an interaction in world markets.

Exports increase the size of the market for producers. Imports stimulate competition in local markets and provide a wider choice for consumers.

The key macroeconomic variables that describe an interaction in world markets are exports, imports, the trade balance, and exchange rates. Economies buy and sell goods and services in world product markets, and buy and sell capital assets in world financial markets.

Whenever a country imports or exports goods and services, there is a resulting flow of funds: money returns to the exporting nation, and money flows out of the importing nation.

International trade allows countries to expand their markets for both goods and services that otherwise may not have been available domestically.

 

Account for the need for an insurance company or insurance broker when export or import arrangements take place.

When a company makes export and import operations, its goods may also be damaged or stolen, which will create financial losses for the company. Therefore, it is necessary to insure the goods in such cases so that losses can be compensated.

 

Say how the exchange rates of Major currencies influence investment decisions of ordinary people and professional investors.

The exchange rate is one of the most important determinants of a country's relative level of economic health. Exchange rates play a vital role in a country's level of trade, which is critical to most every free market economy in the world. Exchange rates impact the real return of an investor's portfolio. Also, company can lose enormous amount of money because of the assets overestimation or if they have debts in foreign currency.

 

Assume how you as an individual and a business may counteract the effect of currency fluctuations.

1. Adjust to the exchange rate

This option implies drawing up schemes and plans for trade flows in such a way as to minimize their possible losses or to relieve themselves of responsibility. For example, the delivery contract should clearly indicate who bears the currency risks. This method does not need to involve additional funds, so it is ideal for entrepreneurs who do not have savings, but want to protect themselves from exchange rate fluctuations.

2. conduct operations on the international financial exchange

In this case, you will need to purchase futures and options on the international financial exchange. These are special agreements that can "freeze" the exchange rate at a certain value. This manipulation will allow you to purchase foreign currency at a fixed rate for the duration of the contract.

3. The simplest method to avoid losses from exchange rate fluctuations is to use the national currency. In other words, you can buy products in Russia or specify rubles as the payment currency when entering into a contract.

4. Limit your liability

To do this, you need to link the cost of all your products to the exchange rate. In other words, the contract must specify that when the exchange rate changes, the price tags on the goods change in the same ratio

5. To eliminate risks

You can cooperate with countries that allow you to buy and sell goods for the same currency. For example, the European Union market. In Catherine's case, she could buy vegetable oil in Italy and sell it in France. So all monetary payments would be made in one currency – the Euro. And Catherine would have been able to avoid currency fluctuations.

International Trade: A Nation’s Balance of Payments. Investments in international trade. (1.3)

Documents Needed in International Trade and Incoterms. (1.6)

Analyze the case when in 1980s when the strong dollar caused severe problems for the US economy. Describe how the cost competitiveness of domestic produce decreased and what measures were taken to control inflation.

Inflation is generally controlled by the Central Bank and/or the government. The main policy used is monetary policy (changing interest rates). However, in theory, there are a variety of tools to control inflation including:

1. Monetary policy – Higher interest rates reduce demand in the economy, leading to lower economic growth and lower inflation.

2. Control of money supply – Monetarists argue there is a close link between the money supply and inflation, therefore controlling money supply can control inflation.

3. Supply-side policies – policies to increase the competitiveness and efficiency of the economy, putting downward pressure on long-term costs.

4. Fiscal policy – a higher rate of income tax could reduce spending, demand and inflationary pressures.

5. Wage controls – trying to control wages could, in theory, help to reduce inflationary pressures. However, apart from the 1970s, it has been rarely used.

In 1980 in the Us in order to combat rising inflation, recently appointed chairman of the Federal Reserve, Paul Volcker, elected to increase the federal funds rate. In order to combat rising inflation, recently appointed chairman of the Federal Reserve, Paul Volcker, elected to increase the federal funds rate. This caused an economic recession beginning in January 1980, and in March 1980, President Jimmy Carter created his own plan for credit controls and budget cuts to beat inflation. In order to cooperate with these new priorities, the federal funds rate was lowered considerably from its April peak. Later Ronald Reagan, who had assumed office in January 1981, brought his own economic plan to the table. In August 1981, the president signed the Economic Recovery Tax Act of 1981, a three-year tax cut plan. In July 1983, the official end of the recession was announced as November 1982.

Cost competitiveness is influenced by the inflation rate, the cost of basic services, infrastructure costs, access to raw resources, transport costs, the value of the currency, and labour and productivity levels.

The strong dollar caused severe problems by decreasing the cost competitiveness of United States exports. The rise of the dollar was associated with a large rise in the production costs of United States firms relative to foreign competitors. This rise in relative costs has at least temporarily reduced the international competitiveness of United States industry dramatically.

 

Explain why many big companies and investment funds use hedging techniques to reduce their exposure to various risks and hedge in some form, for example, against fluctuations in foreign-exchange rates.

Big companies and investment funds subject a large quantity of the risks which potentially can lead to serious financial losses. New risks arise because an increasing of scale of economic activity. For instance, the company becomes subject to fluctuations in foreign-exchange rates in result expansion of activity and entering foreign markets. Also big and mature companies are skeptical of risk and value the stability. So they use different instruments of hedging to reduce risks. For example, they use forward contract and swops against fluctuations in foreign-exchange rates.

 

Types of securities. (2.6)

International Trade: Export and Import. Forex (1.3, 1.6,1.5.4)