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...