International Trade and Foreign Exchange Rates
International Trade and Foreign Exchange Rates
Trade surplus or deficit is usually used to analyze international trade. Speaking about U.S. economy, one need to use surplus of imports only, as the balance of trade this year in January was minus 38702 million dollars, meaning that the US imports goods more than exports (“United States balance of trade”, 2014).
Firstly, this is industrial machinery and equipment, at $731 billion. Almost a half in the category is crude oil ($313 billion). Also, fuel oil ($46 billion), petroleum products ($50 billion) and natural gas ($9 billion) is essential in it. Large amounts of iron and steel products, chemicals, fertilizers are imported by the U.S., $30 billion, $25 billion and $16 billion, respectively.
The second category is capital goods, totaled $548 billion. To be exact, there are the total sum of imported computers, computer accessories, and telecommunications equipment. Next is consumer goods, at $517 billion. The last large category is automotive vehicles, parts, and engines, which was imported on the sum of $297 billion.
As for food, feeds, and beverages, this category is considered to be the smallest with $110 billion. Among them are fish ($17 billion), fruit ($12 billion) and vegetables ($11 billion) (“U.S. International trade in goods and services”, 2013).
There are many positive and negative impacts of importing goods on the US economy. Mostly positives are for trade partners and consumers. Meaning, the former buys imported goods for further distribution at a low price and the latter buys goods also at lower prices than prices of the domestic manufacture.
As for impacts on the US business, it suffers a lot, because manufactures need to spend more money to make their goods more competitive with the imported ones. This can lead to bankruptcy.
One of the indicators, which help to analyze economy of country is gross domestic product (GDP). This is the total market value of all final goods and services produced in a country. International trade is a part of GDP. To be exactly, Net Exports is one of its components. This is the difference between total value of exports and total value of imports. Thus, international trade has a significant impact on the GDP (Reuvid, 2011). If the net exports is positive, GDP increases, if it is negative, than GDP declines.
Regarding effects of international trade to domestic markets, the amount of goods imported from overseas will expand local markets. As a result, intensification of competition makes domestic manufactures produce products of higher quality and, simultaneously, not to increase prices. Another effect of international trade is meeting customer’s demands better as it was during the close market. Consumers will be able to choose the product they want the most, as there will be a huge variety of new products in the market (Reuvid, 2011).
As for influence of international trade on university students, it has to be said that students are not in labor. Consequently, they will react as simple consumers of imported goods. Meaning, that they will buy imported products, which are less pricy more than domestic ones. In addition, they can study international trade relations in the universities.
For some reasons country government can limit imports by trade barriers, such as: tariffs and quotas. Definitely, this affects international relations and trade, but in different ways. Tariffs are a type of taxes that are levied on businesses, which import goods (Reuvid, 2011). The main feature of tariffs is that they increase the imported goods price. It works in the following way: if the overseas company wants to export goods to the country, firstly, it has to pay a tax to be allowed its goods cross the country’s borders. Thus, to cover the loss companies usually add this tax to the goods price.
Quota is another way how government can limit goods, but slightly in the different way. This is a restriction of the amount of a particular kind of goods that can be imported to the country (Reuvid, 2011). When a company decided to export goods to the country, they have to receive a license, which allows them to sell an exact amount of goods. This also can raise the price of imported goods.
As a result, domestic manufactures do not have to reduce the price of their goods. As for domestic consumers, they have to pay higher price than the price before tariffs and quotas.
The effect of the tariffs and quotas to international relations and trade is huge. If company evaluated that the costs of the exportation of goods are very high, it could refuse exporting them at all. Also, if the government wanted to promote trade with a particular country it could lower the tariffs or quotas on the imported goods from this country.
An exchange rate is the price of one currency in terms of another currency (Wang, 2009). To make a proper definition of foreign exchange rate, it would be better to use division of rates into direct and indirect. So, a direct quotation of the foreign exchange rate is the number of units of the domestic currencies per unit of the foreign currency. Meaning, that the base of currency is the foreign one and the counter currency is the domestic.
An indirect quotation is vice versa. This is the number of foreign currency units per domestic currency unit (Wang, 2009). Here the base currency is the domestic and the counter currency is the foreign one.
The majority of foreign exchange rates use the US dollar as the base currency, other different currencies as the counter. Exceptions are euro, the British pound, Australian and New Zealand dollar.
The reason why the foreign exchange rates change from time to time is that a currency value also changes. The reason for the latter is fluctuation in supply and demand for the currencies. The value falls if supply for the currency rises and demand for it declines. If there is vice versa, then the currency value rises.
It is a well-known fact that Chinese goods are of poor quality, they are worse than the ones produced by US manufactures. Still, a lot of people from the US buy them, because of low prices. They are ready to lose in quality if they gain in price greatly.
Speaking about high level, about the US economy in general, it depends on imports of not only goods, but also raw materials, as it is much cheaper for the country to buy material from overseas than to use its own.
The needs of the US people are huge nowadays, so it is just impossible to minimize the amount of imports from all other countries, because it will be a deficit of goods.
Another result caused by restriction of particular Chinese goods is possible increase of the US unemployment rate. Someone needs to sell imported products in the US; someone needs to produce goods from imported materials. That is why there are also positive effects of imports to the US economy.
Trading Economics. (2014). United States balance of trade [Data file]. Retrieved fromhttp://www.tradingeconomics.com/united-states/balance-of-trade
U.S. Department of Commerce. Bureau of Economic Analysis. (2013). U.S. International trade in goods and services [Data file]. Retrieved from http://www.bea.gov/newsreleases/international/trade/tradnewsrelease.htm
Wang, Peijie (2009). The economics of foreign exchange and global finance. Hull: Springer.
Reuvid, Jonathan (2011). International trade: an essential guide to the principles and practice of export. London: Kogan Page Publishers