6assignment wk6

Every country that has a currency has an independent GDP that is not directly tied to another countries GDP. The United States has a GDP that is not directly tied to the GDP of Mexico and both countries GDP is tied to pricing set by the supply and demand for that country. “From a fundamental point of view, any price level is mainly determined by market demand and supply of the product, as well as other influential variables” (Xu, Valentine, & Wang, 2014, pp 115). The GDP is one of the major factors when determining currency exchange rate between two countries. The stronger the individual economy is the higher the value of the independent currency. The GDP is an indication of multiple other factors such as inflation, interest rates, political and economical stability all of which contribute to setting the exchange rate between two countries currency. Economics and by extension currency rate exchange is not an exact science and often incorporates speculation in the form business and government forecasting, this forecasting is included into the equation of currency exchange rate. The value of the dollar is determined by many factors explained briefly above. When the value of the dollar is higher than the value of a different country it is cheaper to buy products from that country. When the value of the dollar is lower it becomes cheaper for them to buy our products. The risk when dealing with trade involving foreign currency is the changing exchange rates. When a business borrows money or makes an agreement to import or export a good from a different company at a set price point, the price point may change simply by the exchange rate changing. “Trading across borders requires the purchase of foreign currency, whose price is named as “the exchange rate”. International businessmen and cross-country consumers care about the exchange rate, since a correct prediction of future exchange rates enables them to make wise decisions on the exchange behavior and thereby earn higher profits” (Yipeng, Shun, & Kexin , 2015, pp 50). In a simple model let’s assume some company bought 100 Martian dollars for 100 American dollars, when either set of currency goes up or down the exchange rate would change proportionately. When the Martian dollar went up in value it now takes one American dollar to buy .8 Maritain dollars, the company would make more in the exchange relative to the American dollar. If the Martian dollar went down in value it now takes only .8 American dollars to buy one Martian dollar, the company would lose value compared to the American dollar. Using the equation for GDP, GDP = C + I +G + (X-M), which of the various components of GDP would be most affected by changing currency levels? Explain. Personal consumption expenditure (C), + Business investment (I), + Government spending (G), + Exports (X-M) = GDP In the above equation exports are most affected by changing currency rates. Personal consumptions and government spending are done in US dollars only and would not require any currency exchanges. Business investment would depend on if foreign companies are involved, but mostly domestic companies, involving little if any currency exchange. Exports would require a currency exchange in most if transactions. The only way that exports would not require a currency exchange is if the destination country traded in US dollars. ========================== · Utilizing the two sources of information below, explain the factors that can affect the relative value of one currency to another in the global economy. The amount of currency in circulation can affect the relative value of it. At the end of the video “Episode 33: Exchange Rates,” it is noted that China keeps its currency value artificially low in order to keep favorable trade balance (Lumen, n.d.). Exchange rates “fluctuate daily in response to the forces of supply and demand for different countries’ currencies” (Kass, n.d., para. 6). Variables that impact exchange rates include inflation rates, interest rates, current account, government debt, political and economic stability, and speculation (Kass, n.d.). · Again, using the same two sources, explain why U.S. presidents often favor a “lower dollar” over the course of their presidency. Some advantages of a strong dollar, according to Hayes and Boyle (2021) include, less expensive when traveling out of the country, imports are less expensive, foreign companies doing business inside of the U.S. will benefit, and for the U.S. the status of the dollar as a world reserve currency is reinforced. There are tradeoffs to a strong dollar, however. One author wrote in 2003, “The falling dollar will bring especially welcome relief to the internationally competitive U.S. manufacturing sector, which has suffered disastrous consequences—lost jobs, reduced profits, and decreased investment—as a result of the dollar’s overvaluation for the past several years (Blecker, 2003, p. 1). Explain the relationship between the relative value of the dollar and its relationship to U.S. exports and imports. As the dollar depreciates, U.S. exports to other countries increase and U.S. imports from other countries decrease. As the dollar appreciates, U.S. exports to other countries decrease, while U.S. imports from other countries will increase. Posit the effect of the relative value of the US dollar and the impact on US GDP. Using the equation for GDP, GDP = C + I +G + (X-M), which of the various components of GDP would be most affected by changing currency levels? Explain. Net exports (X – M) would likely be most affected by changing currency levels. Exports and imports are directly impacted by the exchange rate, so X and M are highly dependent on currency levels.