INT-620 Corporate Finance
2-1 Discussion: Purchasing Power Parity and International Fisher Effect
Hello class,
What market have you selected and what are some of the trade barriers (identify 2 to 4)
between the United States and your selected market? For market selection, identify the
country only by name. You do not need to provide an overview of the country.
I am researching South Africa. The Foreign Trade Barriers article states that, “the EU-
South Africa Trade and Development Cooperation Agreement of 1999 causes the U.S. to be
at a disadvantage. Increase in the tariff in 2020 caused U.S. exports to fall over the past two
years. There has also been export restrictions due to the 2022 influenza. This affects
Amazon’s Whole Foods department.” There is also control placed on the trading of scrap,
residues and other goods.
The article states that electronic equipment must be tested before entering South Africa
to ensure quality-performance standards. The concern is that South Africa does not have the
resources to quickly conduct this process which will slow down trading. There is a digital
trade barrier preventing data sharing. It states that all data must be stored locally.
If these trade barriers were removed, how would it impact the PPP and the IFE? Would they
be more likely to hold? Please explain.
Removing the trade barriers would not only benefit international countries but South
Africa as well. The article, “Bold Steps Taken to Make African Trade Easier, Help Small
Businesses,” states, “if we want the AFCFTA to thrive, we have to ensure operational barriers
are dropped and businesses and traders, especially small ones; don’t suffer from undue
limitations placed on them as they try do the basic thing that makes economies work –
trade.”
According to an UNCTAD report, if these barriers are removed, the African economy
could gain $20 billion – much more than the $3.6 billion it could recover by eliminating
tariffs. “PPP states that the exchange rate between currencies of two countries should be
equal to the ratio of the countries’ price levels” (International Financial Management).
What are the impacts of trade barriers on currency values? Do trade barriers impact
currency valuations? Briefly explain.
According to Investopedia, “the relative values of currencies are influenced by the
demand for them, and that demand is influenced by trade. If a country exports more than it
imports (known as a trade surplus
), there is a high demand for its goods, and thus, for its
currency. The economics of supply and demand
dictate that when demand is high, prices rise
and the currency appreciates
in value.”
Investopedia discusses the imbalances faced with trading, “trade balances and, as a
result, currencies can swing back and forth in value, assuming currencies are floating rather
than fixed. Currencies that are fixed or pegged don’t move as easily as floating currencies in
response to a trade imbalance.”
References:
Bold steps taken to make African trade easier, help small businesses. Bold steps taken to
make African trade easier, help small businesses | African Union. (2024, November 1).
https://au.int/en/pressreleases/20200928/bold-steps-taken-make-african-trade-easier-help-
small-businesses#:~:text=According%20to%20an%20UNCTAD%20report,could%20recover
%20by%20eliminating%20tariffs.
Foreign Trade Barriers. United States Trade Representative. (n.d.).
https://ustr.gov/sites/default/files/2023-04/2023%20Special%20301%20Report.pdf
Lioudis, N. (n.d.). How the balance of trade affects currency exchange rates. Investopedia.
https://www.investopedia.com/ask/answers/041515/how-does-balance-trade-impact-
currency-exchange-
