There are very many factors in economics which have been developed since the spread of globalization. As a measure to determine which countries are economically stable or superior, there are economic factors which are considered and factored in. Each of these factors have an influence on the other, where a decrease or increase in one directly affects the other. In considering these factors, the following paper discusses the impact and relationship between the Trade Balance, Interest rates and Exchange Rates between different countries, using United States and China as examples.
For a country to practice globalization, there must be trade between itself and another country. For example, China exports certain products to the United States and at the same time, there are certain products with which it imports from the United States. Trade Balance or the Balance of Trade (BOT) occurs where the difference between the country’s exports and its imports is determined. Hence, BOT is defined as the deduction of a country’s imports from its exports (Exports – Imports = BOT)(Abbas Ali, Johari, & Haji Alias, 2014). Where a country is exporting more than it is importing then there is a Trade Surplus , where it is importing greater than it is exporting, then there is a Trade Deficit . It is considered favourable for a country to have a Trade Surplus as it a Positive Balance of Trade where the country is receiving a net inflow of its own currency from foreign markets (Abbas Ali et al., 2014).
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Globalization and the practice of trade involves the inter-mix of different currencies for payment of different activities. These currencies, each have their own unit of measure against another and hence requires a global standard to dictate the value for each one against the other. This is known as Exchange rate. It is defined as the comparison of price or worth between one currencies to another. In practicing trade with each other, there are situations where a country requires to borrow specific assets or resources from another. In doing so, the country acting as the lender charges a specific percentage amount from the principal for the use of its finances/ money (Marthinsen, 2014).
BOT, exchange rates and interest rates are related to each other in the following manner. Where a country continues to finance another country through loans, then it is able to increase its interest rates. In doing so, the country attracts other foreign capital or foreign investment, the exchange rate of the country increases. For instance, purchase of products such as electronic equipment from China to the United States. The US has to buy China’s currency first in order to pay for the products (Abbas Ali et al., 2014). Once they do so, the foreign exchange rate of China will increase as its demand has increased, however, the Currency of United States, will fall as it is being supplied to the foreign market. With this, the currencies of other countries will appear cheaper to China. Hence, China will want to import products from other countries (Marthinsen, 2014). They are then able to sell to their people products at cheaper prices. This then rises the demand for these products as they allow for an increase in profits within the country. On the flip side, China is at a disadvantage as other countries will view its currency as expensive and will not want to purchase products from it. Its suppliers then have to reduce their products prices in order to meet international prices. The exports of China decrease while the imports increase leading to a Trade Deficit (Abbas Ali et al., 2014).
Currently, China is experiencing a Trade Surplus compared to the United States which is experiencing a Trade Deficit. China has an advantage over the United States as it is exporting to it more than it is importing. Also, as an example, where the United States is borrowing a lot of funds from China, China’s foreign exchange rate increases with increased foreign investment to the country. China’s currency has an opportunity to dominate over that of the United States because the United States Currency is being supplied to the foreign market more than the Chinese Yen. This situation is known as an “International Crowding Out”, where one country has borrowed so much from another that the interest rate of the other country rises (Marthinsen, 2014).
References
Abbas Ali, D., Johari, F., & Haji Alias, M. (2014). The Effect of Exchange Rate Movements on Trade Balance: A Chronological Theoretical Review. Economics Research International , 2014 , 1–7. https://doi.org/10.1155/2014/893170
Marthinsen, J. E. (2014). Managing in a Global Economy: Demystifying International Macroeconomics . United States of America: Cengage Learning.
