1) Explain the difference between appreciation and depreciation of a nation’s currency. How do these changes affect the foreign exchange market?
The depreciation of a nation’s currency occurs when during the international trade in currency, it is discovered that a certain currency is much less worth than it was before. The depreciation of a nation’s currency is not only restricted to the world market. Currency can also be of less worth within a country. When this happens, it causes inflation within that country. A depreciation currency is of less value when compared to that of another country.
Due to market economics, currency’s value is dynamic relative to other currencies. Currency appreciation occurs when its worth in comparison to another national currency increases. A currency that has a high demand and people want to buy and own will tend to increase. Whereas a currency whose demand is low and people are willing to buy and retain will tend to depreciate and is a depreciation currency. Currency depreciation occurs when the currency’s trading falls as compared to a standard such as diamond or another currency. Currency appreciation also occurs when the amount of units it buys on a standard such as gold increases in contrast to another currency (McEachern 45).
There has been an increase in trade agreements that prop up free trade. One such agreement is the North American Free Trade Agreement (NAFTA). There has also been the setting up of organizations such as World Trade Organization. Despite this, majority of the countries still do have trade restrictions. Although they have negative effects on world trade, most are to safeguard on the country’s investors. It is argued that the trade restrictions have negative effects on the market that far outweigh their merits. These trade restricts are inclusive of tariffs, quotas, subsidies and embargoes.
2) Identify and explain three trade restrictions. In your opinion, which method of restricting trade is the most efficient?
Some trade restrictions include tariffs and quotas imposed by the governments of the respective countries. A tariff is a tax that is imposed on an imported good or service. The tariffs imposed have the effect of raising the cost of importing the products and consequently their prices when they enter the local market. This means that those of the local market are priced less relative to the imported ones. The government dictates the quantity of a product that can be imported into the country by imposing an import quota. Quotas have the effect of creating shortages of the respective goods thus pushing up their prices. Both trade restrictions have negative effects on the importers and the consumers. This is in contrast to the domestic producers who are favored by the restrictions (McEachern 78).
An embargo is a more drastic trade restriction measure that is imposed by the government. During an embargo, the government bans the importing of the products into the country from other countries or forbids its own producers from exporting their products to other countries. Examples of embargoes include one that the United States had imposed against Cuba in 1960. The reasons to this were purely political. Oil producing Arab nations had placed an embargo against the United States of America due to its relations with Israel. This embargo had the negative effect of soaring oil prices worldwide and gasoline shortages.
Subsidies are a form of trade restrictions that a government imposes in a more indirect way. This involves the government giving assistance or support in form of aid to a particular trade. This is often an industry that is starting, or one that has been neglected or faces closure. They are usually meant to be temporary until the industry can fully support itself but more often than not the industry become dependent on the government aid. The subsidies have a negative effect on the producers who are not eligible for the aid. Of the various trade restrictions, tariffs and quotas are better as they support the local producers and earn the government extra foreign exchange that can be used to subsidize the cost on the consumers. This means that only the importers are hurt.
McEachern, William. ECON Macro 2. Chittenden, VT: South-Western Pub, 2010. Print.