International Economics: Foreign Exchange Market

Introduction 

The international market plays a significant role in the economic growth of a nation. Domanski, Kohlscheen, & Moreno (2016) presented models depicting that for a firm to be productive, it has to depend on external markets. This reliance involves investing through Foreign Direct Investment (FDI) and exports. The model further postulates that only the less productive firms depend on the internal markets. Therefore, countries should promote their firms to be globally competitive and expand the home country economy. The foreign exchange market is an essential factor in the development of the country's economy. In that case, the exchange rate in the international markets determines currency value, creating the exchange market rates. 

Discussion 

United States Dollar has been depreciating against China Yuan, despite appreciating against the New Zealand Dollar. This case has been caused by some of the factors such as the U.S. limiting its market produced goods. The Chinese firms, on the other hand, encourage many investors in manufacturing industries to invest in their countries, and the manufactured goods exported to other states. The Chinese government has also supported the local investors in the country to ensure that the production costs are minimal. To promote export in the U.S., I will first implement a policy in a way that both American and other nationalists can trade freely in the market. The U.S. investors have allocated their production processes in different countries based upon the comparative merits. On one side they have the production, and on the other hand, they have consumption-oriented production (Yang, Cai, Zhang, & Hamori,2016). This has enabled the firm to earn minimum revenue on the value-added from both the direct and indirect exports of production-oriented output. Hence, I will have to change the policy to allow more investors with consumption-oriented production techniques to invest in other countries, therefore, opening up for more investors in the U.S. 

Furthermore, I would take a keen study with the help of economists to determine the structure of market competition. Firms need to consider the markups in the business market. To have maximized markups, firms will be encouraged to have branches of the firm to ensure that the cost of production is minimized. Also, desirable strategies for firms differ across industries, and this raises the need to identify the rates in the financial markets, so s to invest in a market where the economy is favorable. 

The foreign exchange rates are constructs of foreign currencies, which are traded in an over the counter marketplace. It is the largest financial market in the globe and is comprised of a world network of business centers that transact throughout except on weekends. In this market, the currencies are traded in pairs. That is, the value of one currency in that pair is compared with the value of the other currency. The investors from different countries make a standard contract basing on the value of the country currencies, which are then used in the trade. This market is called a forward exchange market (Yang, Cai, Zhang, & Hamori, 2016). The forward exchange market is a market where trade contracts are made to ensure the future delivery of a foreign currency exchange rate. 

Traders benefit from the forward exchange market by having a standard exchange rate backed up with a contract, agreed on any future date and can be used on that particular date decided. The determined rate ensures that every investor sticks to the rules and regulations in other markets and that any central bodies or central overseer do not influence them. These contracts are made in a market called the free exchange market. 

In a free market, the exchange rates were previously determined by a fixed standard whereby each country had to back up its currency with precious metal, or a floating, whereby each currency is not necessarily backed up by a resource (Ahmed, Coulibaly, & Zlate, 2017). Currently, the exchange rates in the international market are determined by managed floating exchange rates. That is; the economic conditions of its government or the central bank of its country, political conditions, and the market psychology and perceptions of the trader affects each currency. 

The article by Tahir, Gul, and Qazi (2019) explores the relationship between stock returns and macroeconomic factors in Pakistan. According to the article, there are certain macroeconomic factors that influence the returns of an investment. Money supply (M3), consumer price index, exchange rate, and inflation rate positively influence the stock returns, while inflation, industrial pricing index, and inflation negatively affect the stock values. Depreciation of a country’s currency increases foreign investments and imports, while appreciation decreases the value of exports. This underscores the role of the exchange rate and strength of a country’s currency against a foreign currency in economic growth. 

Conclusion 

The government should focus more on exports increase and minimize the imports to cope with the current economic trend. Exports are not only ready for consumption but preferably countries can establish production firms abroad to ensure that the transportation cost and other freight expenses are minimized. Besides, for the United States, it should encourage its firm to focus more on developing countries where resources are available in plenty, and they depend on consumption. 

Reference 

Ahmed, S., Coulibaly, B., & Zlate, A. (2017). International financial spillovers to emerging market economies: How important are economic fundamentals? Journal of International Money and Finance , 76 , 133-152. 

Domanski, D., Kohlscheen, E., & Moreno, R. (2016). Foreign exchange market intervention in EMEs: what has changed? BIS Quarterly Review September . 

Tahir, M., Gul, A., & Qazi, S. (2019). The causality between macroeconomic factors on stock returns: a study of Pakistan equity market.  International Journal of Information, Business and Management ,  11 (4), 213-223. 

Yang, L., Cai, X. J., Zhang, H., & Hamori, S. (2016). Interdependence of foreign exchange markets: A wavelet coherence analysis. Economic Modelling , 55 , 6-14.