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The foreign exchange rate Is described as the price of one country’s runners expressed In another country’s currency (Colander, 2010). This definition Is important because it allows individuals to understand that the process by which foreign exchange rates are determined similar to other market functions. There is a required supply and demand for goods which will allow the market to determine what the prices of these goods are. The foreign exchange rate is explained as simply substituting these goods for various countries’ currencies.
To better explain that how the foreign exchange rate works In relation to the market take the dollar-rupee exchange rate for example. The exchange rate for these two monetary values will depend on the direction that the demand-supply balance moves. When Indian’s the demand for the U. S. Dollar rises and Indian supply does not rise in correspondence, each American dollar will cost more Indian rupees to purchase. Understanding how this foreign exchange rate works will help individuals to better comprehend how trade between the US and other foreign countries such as India affects the GAP.
International Trade and GAP Gross Domestic Product (GAP) is the representation of the total dollar value of all odds and services produced over a specific time period (Investigated, 2012). Meaning that Gross Domestic Product is the actual “size” of the economy. The most effective way to understand the effects of international trade to GAP Is through real- life examples. Take into consideration trade between the united States and Mexico (Korma, T, 2003). As the united States’ demand for Mexican Imports Increases the united States demand for Mexican pesos also increases.
This demand for pesos in America will raise the price of the peso in dollars. As Americans continue to arches more Mexican imports the United States net exports and subsequently the GAP as well as American employment will begin to decrease. As the U. S. Exports to Mexico begin to rise due to the Idea that Mexico is cheaper, a reverse trend will begin reverse the effect on the United States’ net exports, as they will increase when the exports to Mexico increase.
Tariffs and Quotas on Imports Countries that enter into trade agreements with each other will impose either tariffs or quotas on imports as a means to protect domestic production. Choosing the appropriate tariffs or quotas is a delicate balancing act because the country is imposing the tariffs and/or quotas as a means to protect the domestic business sector. An example of this is, if the United States produces a technology and the same technology is imported from foreign soil at a cheaper rate, a tariff or quota would be introduced to ensure the cost of the foreign technology is up to the cost of the domestically produced technology.
These tariffs and quotas are important because in the event that the scales become unbalance, international relations as ell as trade are strained. When international relations and trade become strained, the foreign trade partner will initiate its own counterbalancing tariffs and quotas. For this vary reason the United States will not restrict all goods coming in from China as this move would initiate a trade war. This attack on each countries’ trade is accomplished by imposing high tariffs or quota restrictions.
It is unfeasible for the United States to minimize imports coming in from all countries because of the various trade agreements the United States shares with these country’s varies. For example, a small developing country could only have one or two products it produces and trades; while a larger more developed country will have an abundance of products it produces and exports, a surplus of these imports can be disastrous. Surplus of Imports If a surplus of imports is brought into the United States, American businesses will suffer from an increase of foreign competition.
Oil is a prime example off product that America imports in surplus. In August of 2011 The Wall Street Journal accurately predicted the United States would experience an oil surplus (Heron, J. 2011). This prediction was accurate because the United States continued to import at the same levels it domestically produced. Because The United States has experienced this surplus it has since began to decrease the amounts of both imported and domestically produced oil.
It is easy to assume that since America has a surplus in oil consumers would reap the benefits of lower prices. Unfortunately every time that an individual fills up a vehicle at the gas station they are reminded that this is not an accurate assumption. While the cost of fuel is more complex than the above ascription the underlining point is that a surplus of an import can cause American businesses and domestic consumers to suffer gravely.