Speaker of the House Speech, Research Paper Example

The United States current macroeconomic state is made up of various processes that are highly involved. My goal is to try explaining a few of the simple concepts and terms that focus on foreign exchange rates and international trade.

Foreign Exchange Rates

A basic understanding of the definition of an exchange rate is a must. Investopedia defines foreign exchange rates as the price of one country’s currency converted in another country’s currency (Investopedia, 2012). The methods used to determine foreign exchange rates don’t differentiate in a significant manner from any other market function. The prices for different goods are determined by their supply and demand. Substitute currencies for goods, in this case. In order to fully comprehend how this market functions, let’s take the case of one foreign currency. The exchange rate for dollar-rupee will be based on how the balance between demand and supply moves. More rupees will be needed to buy each dollar as the dollar demand in India increases and the supply doesn’t in a corresponding manner. Understanding a foreign exchange rate will allow one to comprehend how the GDP is affected by the trade between the United States and foreign countries.

International Trade and GDP

The total dollar value of all services and goods produced over a specific time period is represented by Gross Domestic Product (GDP) (Investopedia, 2012). The actual “size” of the economy is determined by this. The effects of international trade to GDP can be best described with the use of an example. We will use the trade between Mexico and the United States (Gorma, T, 2003).

The demand for Mexican imports in the United States increases.

The demand for pesos within the United States is increased due to this.

The price of peso in dollars rises as the demand for pesos rises in the United States.

United States net exports (and employment and GDP) will see a decline as more imports from Mexico are purchased by Americans.

Nevertheless, this situation will be automatically corrected with the change in the exchange rate because a) the United States’ demand for Mexican imports will decline as the price, in dollars, of Mexican imports increases, and b) the demand for U.S. products will rise in Mexico as the price, in pesos, of U.S. exports to Mexico falls.

The trend that started due to the United States’ increased demand for Mexican products will be reversed as the number of exports to Mexico from the United State increases. The effect on U.S net exports will also be reversed; the net exports will rise as exports to Mexico increase.

Tariffs and Quotas on Imports

The domestic production will be protected with the imposed quotas and/or tariffs by the trade agreements in countries. Choosing the appropriate quotas and tariffs is nothing short of a balancing act. The domestic business sector of a country would be protected by the tariffs and quotas imposed by that country. For instance, if a widget is produced by the United States and a foreign widget that costs less is imported, then a quota or tariff would be placed on the foreign widget to raise its cost to that of the widget that is produced domestically. International trade as well as relations will be strained if the scales aren’t balanced. As a result, counterbalancing quotas and tariffs will be instituted by the foreign trade partner. A trade war would take place if the United States was to place restrictions on all the goods that come in from China. A trade war occurs when countries aim at damaging each other’s trade. This is done by imposing quota restrictions or high tariffs. The imports that come in to the United States from all countries can’t be minimized because the trade agreements between the United States and other countries differ from one another. Only one or two products may be produced and traded by a small developing country while a wide range of products may be produced and exported by a larger developed country. As one is able to assume, a surplus of imports would prove to be a disaster.

Surplus of Imports

A surplus of imports coming into the United States could be damaging for American businesses because of the increase in foreign competition. Oil is a product that has an import surplus. In August of 2011, the Wall Street Journal predicted that an oil surplus would be experienced by the United States (Herron, J., 2011). The United States has an oil surplus stored because it continued to domestically produce as well as import at the same level. The surplus has occurred in the United States and the amount of domestically produced and imported oil has decreased since the article was published. Although there is a surplus of oil, the prices for petroleum based products has not lowered. This is because a surplus of imports causes the suffering of domestic consumers and businesses.

References

The Complete Idiot’s Guide to Economics © 2003 by Tom Gorma Retrieved from http://www.infoplease.com/cig/economics/effect-imports-exports-gdp.html

Herron, J., Oil Surplus Seen if Recession Re-emerges,(August 11,2011) Retrieved from http://online.wsj.com/article/SB10001424053111903918104576499640733192116.html

Investopedia (2012) Retrieved from http://www.investopedia.com/terms/e/exchangerate.asp#axzz1m689DJ1v