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Trade Mechanisms and

Exchange Rate Determination

By Group 2

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Overview

Introduction Reasons for trade

Governments intervention

Barriers to international trade

International trade theories

Advantages and disadvantages of trade International Monetary system

Foreign Exchange

- Major Foreign exchange instruments

- Participants in foreign exchange markets Foreign exchange trading process

Contemporary exchange rate systems

Determination of foreign exchange rates

Factors affecting foreign exchange rate

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What is trade?????

History of trade

- The way that paved on..

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Does the trade happen within the

nations?????

International trade

History of International trade

- The Era

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Reasons for trade

Differences in technology

Differences in Resource endowments

Differences in demand

Existence of economies of scale of

production

Existence of Government policies

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Do Government intervene in the trade?????

Reasons

Market failure

Distribution of income

Non-economic objectives

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Barriers to International Trade

Non-tariff barrier

Tariff barrier

Voluntary constraints

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International trade theories

Merchantilism

The Absolute advantage Fallacy

Comparitive advantage theory

Product life cycle theory

Heckscher (1919)-Olin (1933) Theory

The Leontief paradox

Porters Diamond theory

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Heckscher (1919)-Olin (1933) Theory

Porters Diamond theory

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Why do nations trade with eachother?????

Are they beneficial?????

Do nations suffer?????

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Advantages of Trade

Greater availability of goods for consumption

Efficient allocation and better utilization of

resources

Promotes efficiency in production

Employment generation

Better quality of goods

Increased standard of living

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Disadvantages of trade

Local production may suffer

Local industries may be overshadowed by their

international competitors

Rich countries may influence political matters in other

countries and gain control over weaker nations.

Ideological differences may emerge between nations

with regard to the procedures in trade practices.

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International Monetary System

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2. Between the world wars ( 1919 1939)

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3. The Bretton Woods era

( 1945 1971)

Harry Dexter White and John Maynard

Keynes at Bretton Woods

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4. The post Bretton woods system

(1945 present)

The New York Stock Exchange The

current era has seen huge and turbulent

flows of capital between nations.

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An insight of..

International Monetary Fund ( IMF)

The IMF and the World Bank

European Monetary System

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Foreign Exchanges

- Evolution to foreign

exchange rate..

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Major Foreign exchange instruments

The spot market

The forward market

Option

Futures

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How companies use foreign

exchange?????- Participants in

foreign exchange markets

Traders/brokers

Speculators

Hedgers

Arbitrageurs

Governments

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Foreign

exchange

broker

OTCInterbank

Market

Local

Bank

Clientbuys euros

with $ U.SLocal

Bank

Clientbuys $ U. S

with euros

Securities

Broker

Securities

Broker

Securities

Exchange

CME

(futures)

PSE

(options)

Structure of

Foreign

Exchange Markets

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Contemporary exchange rate systems

Fixed rate system

Crawling peg system

Target-zone agreement

Managed float system

Independent float system

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Determination of foreign exchange

rates

Supply and demand

Purchasing power parity

Interest rate parity

The Balance of payment approach

The Monetary approach

The portfolio Balance approach

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Factors affecting the exchange

rate Fundamental factors

Political and psychological factors

Technical factors

- Capital movement

- Relative inflation rates

- Exchange rate policy andintervention

- Interest rates

Speculation

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Thank You