Applying International Trade Concepts Simulation and Economics

Applying International Trade Concepts simulation and Economics
Before one can describe the influences that affect foreign exchange rates one must understand what a foreign exchange rate is and the mechanisms nations use to establish their exchanges rates for their currencies. According to the encyclopedia of business, a foreign exchange rate or international exchange rate is the price of one country??™s currency in terms of another??™s. Exchange rates are determined by the supply and demand for currencies, many of which are traded on foreign exchange markets (Reference for Business, 2011). It is imperative to manage the risk of adverse currency fluctuations in the world market to remain competitive in the business world, because the exchange rate is the world??™s largest market.
The three main mechanisms nations use to establish exchange rates for the nations currencies are the gold standard, which is measured in units of gold; pegged rates, which is the government denominating their currencies into units into whatever the strongest currencies are at the time, usually the US dollar; and free floating rates, which are set by free market forces. The gold standard has not really been used since the 1970s, so the exchange rate market mechanism today is driven by the pegged rates and free market forces. The floating rate is the most commonly used by the world??™s largest economies, such as Europe, US, and Asia.
After defining exchange rates and the mechanisms used to establish the exchange rates in the global market one can describe the influences that affect foreign exchange rates. Several negative and positive factors influence the exchange rates, most of which are market influences. Such market influences are relative rates of inflation, comparative interest rates, growth of domestic money supply, economic growth (GDP), government policy and political stability, and central bank intervention (Reference for Business, 2011) .
One of the main influences that affect foreign exchange rates is current events or the news. Governments, investors, and business monitor other countries current events and news to evaluate events pertaining to political issues, financial news, and country??™s social disorder. If a certain country is having political issues that country??™s currency may weaken, for example, Egypt went through a change in government recently and their country??™s upheaval may weaken or strengthen the exchange rate. It may weaken due to the chaos in the country??™s society because most of the citizens are rallying and products and services are at a standstill, which could affect the Gross Domestic Product (GDP) for that country.
Several other factors influence the affect on foreign exchange rates, such as unpredictable and predictable events, financial reports, rumors, and currency pairs (ForexCustomerReports, 2011). Predictable events are such things like elections, government policy changes, the world Olympics. Unpredictable events are such things as natural disasters, for example, the recent disaster in Japan. Financial reports are carefully monitored for information on changes in GDP, employment, interest rates, inflation, and major financial institutions. A good example of this is the combination of the US news and financial reports about the bailouts to major financial institutions about five-six years ago.
Many factors influence the affect on foreign exchange rates, and it is very important to pay attention to all these tools in order to stay competitive in today??™s world market and for the well being of our own investments for our future. If each and every citizen were educated in simple economics, and made some personal changes to our individual lifestyles, and government changed its greedy lifestyle, it is quite possible our country could repair itself to its once powerful glory.
Several issues surround international trade, such as comparative advantage versus free trade, government policies, child labor laws, labor unions, etc. All the above issues that surround international trade are debatable. One can debate that comparative advantage is the way to go because it offers the best solution to the trading country??™s, but one can debate how can one country make sure that they will be protected if something goes wrong. The author believes that too many individuals and country??™s have become greedy and have lost morals and values when comes to dealing in business. Whether we are conducting business at the corner store or half around the world, society has become too demanding and greedy. Everyone and every company is trying to get the most, and the best for the least amount of money. If everyone conducting business with equal values and morals and not try to deceive the other, international trade and economic growth would benefit all.
Unfortunately this is not reality, each country, culture has different morals and values, and one must ensure self preservation. In reality one must have laws and regulations to maintain fair trade among individuals and countries. But how does one decide what is fair and not pertaining to the laws and guidelines on international trade between different countries and their cultures. For example, child labor laws, one country believes it is wrong to put children to work to produce and manufacture products and services, where another country believes that it is fair that they put their children to work in order for their country to survive. Since countries cannot trade without quarrel, organizations have been made to ensure that trading can be done globally being the mediator to ensure that everyone is playing fair.