One may try to understand what exactly a foreign exchange rate is. To help understand, let’s view a foreign exchange rate as exchanging one dollar at a department store for a product. If one were to go into a department store and purchase a pair of socks in a three pack for one dollar, or each for 33 cents, one would be able to relate that the dollar-to-socks exchange rate is three socks because one exchanged a single dollar for three pairs of socks. Similarly, the sock-to-dollar exchange rate would be one-third of a dollar, meaning 33 cents.
This is because if one decides to sell a single pair of socks, one would get 33 cents in exchange. Moffatt) The same principle hold true for foreign currency. On May 9, 2013 the U. S. -to-Euro exchange rate was . 767 EUR, meaning that for one U. S. dollar, one could purchase . 767 Euros. In order to determine the amount that one could exchange one Euro to the dollar, one could use this simple formula: Euro-to-U. S. exchange rate = 1 / U. S. -to-Euro exchange rate. Euro-to-U. S. exchange rate = 1 / 3767 = 1. 303. This equation shows that one Euro would be exchange for 1. 303 U. S. dollars. (Moffatt) Now that what have an understanding of what a foreign exchange rate is, let discuss how these rates are determined.
Using the two previously discussed currencies, each of their rate are determined in a foreign exchange market that is open to a very large range of various sellers and buyers. Each country incorporates mechanisms that will in turn aid in managing the value of their currency. These mechanisms help in determining the, either pegged and fixed, or free-floating. A peg system is when a country tries to keep their currency at a fixed exchange rate, as the Chinese have done between 1994 and 2005. Doing this sometime devalue or over-value their currencies, which can result in either a trade deficit or surplus.
Free-floating is when the currency’s exchange rate is allowed to vary against currencies of other countries, allowing supply and demand in the market forces to determine its exchange rate; exchange rates for these currencies are determined around the works by banks and are quoted through the financial markets. (Mayer) International Trade The effects of international trade means lower prices for goods and services; competition for the domestic markets and less of a choice for employment for University of phoenix students after graduation.
When the country invests more in international trade that local business and companies; the Gross domestic product may start to suffer and business may start to go out of business due to loss in business. International trade takes away from local farmers and business owner’s success. If the country is constantly making international trades, eventually the United States would no longer have a need for local farmers. The local farmers would have surplus that may spoil due to not being sold. This could cause the farmer to become bankrupt. International trades mean less cost for products and services for the consumer, (“Investopedia”, n. ).
So in return that means less business for the local farmers and business owners as mentioned before. The effect of international trade effects University of Phoenix student mainly after graduation. If all of the jobs are being outsources or traded overseas; what opportunities does that leave the new potential employees? The students would not have a job of choice, depending on the degree they have pursued. It would be unfortunate for a student to complete a program and not be able to use their degree effectively due to their job of choice being outsourced overseas. International trade is not all that bad as it is made out to be.
Without international trade, we would not be able to experience different types of foods from other countries that cannot be produced in our country, (“Investopedia”, n. d). Tariffs and Quotas International relations and trade can be affected by the choices governments choose to fallow. First, what are tariffs and quotes? Tariffs or sometimes known as custom duties also, they are a certain amount of tax value placed by governments on international trade goods and are typically on imported goods. Quotas are limits placed on the importers, which gives them a certain amount of time they may import their goods.
Quotas generally favor the importer, because they tend to drive the cost of goods up, which in turn gains revenue for the importing companies. Tariffs do the opposite, they generally will bring revenue to the government, because they are a tax and the government will gain in revenue. Although tariffs and quotas bring revenue to the companies and the government, they can also have a negative affect if the tax is too high or if the quotas are so small. Price of the goods will sky rocket and problems in the international trading world will arise. One example, which according to Colander (2010) stated,“ Probably the most infamous tariff in U. S. istory is the Smoot-Hawley Tariff of 1930, which raised tariffs on imported goods to an average of 60 percent.
It was passed at the height of the Great Depression in the United States in the hope of protecting American jobs. It didn’t work. Other countries responded with similar tariffs. As a result of these trade wars, international trade plummeted from $60 billion in 1928 to $25 billion in 1938, unemployment worsened, and the international depression deepened. ” (Colander, 2010, p. 458). Import of Goods If the U. S. restricted all goods coming in from China then the U. S. would lose a significant amount of comparative advantage with China. What this means is that goods manufactured in China, India and other Asian countries are creating demand for advertising, management, and distribution, and are therefore creating jobs and income in the United States” (Colander, 2010, p. 453).
Currently the U. S. is now a debtor nation and China plus India are creating jobs and helping the U. S. economy. The U. S. could not afford to restrict China because this could cause problems internationally with the two countries and the U. S. economy would suffer from bad relations. Why cannot the U. S. just minimize the amount of imports coming in from all other countries? The U. S. annot minimize the amount of imports coming in from other countries because this would hurt the U. S. economy as a whole. Minimizing the amount of imports could also hurt the reputation of the U. S. on the international trade level and the U. S. could end up losing trading partners with other countries.
The U. S. is consuming more imports then selling of exports so minimizing the amount of imports would also be very difficult. Again this could make the U. S. economy crash from the loss of imports. “International trade, and changing comparative advantages, will become more and more important for the United States in the coming decades” Colander, 2010, p. 470). Surplus A surplus of imports that is brought into the United States is when imports exceed exports, meaning that the demand for U. S. goods or services is in the negative. A negative export affects the economy’s income and output, the employment rate, prices of goods and services, and the rate of inflation. An example of a product with an import surplus, and the impact that it had on the U. S. businesses and consumers is the motor-vehicle manufacturing sector.
“The motor-vehicle manufacturing sector is the second-largest employer among all U. S. anufacturing industries, and auto parts and tires contribute the most direct jobs (nearly two-thirds or more) to the motor-vehicle sector. ” (Scott, 2012) Since the United States Government helped with the restructuring of General Motors, there has been a strong turnaround in U. S. auto sales, but this still does not stop the massive import and surplus of automotive parts available on the U. S. market. Chinese exports to the United States have increase by 900 percent in the last decade, thus affecting the employment rate of those that would be working in the United States auto-parts industry.