trade

trade

Trading activity has been the order of the day in all countries. For a country to boost its economy, business is given a higher priority, and the country ensures that it promotes foreign trade. Usually, there are predefined standards in the international market, which are meant to ensure that goods manufactured by different countries can be easily integrated. During international trade, countries often value the monetary value of their products as this boosts the country’s currency. Therefore, it is prudent to mention that different countries relate through currency. International monetary relations encompass the range of institutions and habits the facilitate money to function in a global market. Often, international monetary relations are intertwined with power and national interests. This paper justifies international monetary relations, foreign exchange, and exchange rates. Also, the paper evaluates how currency depreciation affects trade balance.

An international monetary system is defined as a set of regulations that have been internationally agreed upon, which support trade in an international scope (Andrews, 1994). Over the years, superpower nations have dominated the international market. This is because their currency is usually of high value. Also, most of those countries are developed states. Therefore, most of their products are of high quality. This kind of dominance in the international market makes it difficult for third world countries to sell their products at a fair price. International monetary relations are often determined by the superiority of a country’s currency (Broz & Frieden, 2001). International monetary relations determined the country’s GDP.

Foreign exchange refers to the conversion of one currency to another. In the global scope, currency from one country can be converted to another country’s currency using the foreign exchange rates that are determined by either the international market or the country’s central bank. The foreign exchange market is a place designated for selling and buying currencies from different countries. The market provides the physical and institutional structure where the money exchange is done (Froot & Thaler, 1990). Also, the market has exchange rates that are used to convert one currency to another. When companies or citizens import goods and services from other countries, they have to pay for those bills in their local currency. For this reason, the foreign exchange comes in hand. Also, when a country is seeking loans or grants from another country, the money sent must be converted from the foreign currency to the local currency using the foreign exchange rate..

The exchange rate refers to the value and the price of a country’s currency with another currency. In foreign exchange, the exchange rate determines the equivalence of one currency to another. Often, the international market and a country’s central bank determines the exchange rate with the country’s economic status. Every day, exchange rates between different currencies change depending on the current economic state of the domestic and foreign countries (Longe, Balogun & Muhammad, 2019). When a country’s economy is stable, its currency gains value in the international market; therefore, with the domestic currency, its exchange rate is usually high.

Currency depreciation refers to a state where the domestic currency value depreciates drastically. This means an individual with the domestic currency sells the currency at a meager price in the foreign exchange market since the exchange rates of the money are negatively affected. The primary cause of loss of value of a country’s currency is economic instability. On the other hand, economic uncertainty could be caused by several factors in a country, including; political instability, inflation, the health crisis in a country, and unfavorable climate change, which creates a reduction in production rate (Agyemang & AfrahSakyi, 2020). When one or more factors mentioned above occur in a country, the country experiences retarded economic growth and development, thus making her currency to reduce value in the international foreign exchange market.

Currency depreciation negatively affects the trade balance both locally and internationally. During the devaluation of the currency, a country exports more agricultural products for further processing in other countries. On the other hand, since the currency has low value in the international market, the volume of imports is reduced significantly. This action is taken to minimize the amount of money going out of the country. When the size of imports and exports is tampered with, the overall balance of trade becomes adversely affected since there are low trade deficit and high trade surplus within the local market (Putri, 2019).

In conclusion, as stated above, international monetary relations, foreign exchange, exchange rates, and currency depreciation are closely related. A change in one factor is likely to affect other sectors, thus causing an impact on the trade balance of the country. Developed countries such as the United States have laid strategies to ensure their currency gains value and has a significant dominance in the international market. Also, marketing strategies enable such states to suffer from currency devaluation. On the other hand, developing countries have laid strategies to improve their currency value and also gain dominance in the international market in the long run.

References

Andrews, D. M. (1994). Capital mobility and state autonomy: toward a structural theory of international monetary relations. International studies quarterly, 38(2), 193-218.

Broz, J. L., & Frieden, J. A. (2001). The political economy of international monetary relations. Annual Review of Political Science, 4(1), 317-343.

Froot, K. A., & Thaler, R. H. (1990). Anomalies: foreign exchange. Journal of economic perspectives, 4(3), 179-192.

PUTRI, K. H. (2019). The ImpactImpact of depreciation of exchange rate toward trade balance in Indonesia (Doctoral dissertation, KDI School).

Agyemang, N. K., & AfrahSakyi, A. (2020). The ImpactImpact of Currency Depreciation in Developing Countries. International Journal of Psychosocial Rehabilitation, 24(4).

Longe, A. E., Adenola, F., Balogun, A. M., & Muhammad, S. (2019). Asymmetric and Non-Asymmetric Impact of Real Effective Exchange Rate on Trade in Nigeria. Izvestiya, (4), 259-274.