Answer to Question #80700 in Economics of Enterprise for nosihle

Question

Differentiate between an exchange rate and the foreign exchange market. (4)
4.2 Explain how changes in exchange rates can influence exports and imports in your country
Discuss ANY FIVE (5) arguments for and against the use of trade barriers by the government of your country

Answer 1

Differentiate between an exchange rate and the foreign exchange market.
An exchange rate is the rate at which one currency will be exchanged for another.
Foreign exchange market is the market at which the currency of one country is sold or bought with another country. In this market the currency exchanges at the exchange rate.
So, exchange rate is the rate or value. But foreign exchange market is the area or place of activities.

4.2 Explain how changes in exchange rates can influence exports and imports in your country

Changes in exchange rate affect the trade between countries.
When the currency of a country appreciates, imports are cheaper and exports are less profitable. So, we buy more import goods and domestic enterprises sell less goods to other countries because of export becomes less profitable. The purchasing power of the domestic currency goes up.
When the currency of a country depreciates, imports are more expensive and exports are more profitable. So, we buy more domestic goods and domestic enterprises sell more goods to other countries because of export becomes more profitable. The purchasing power of the domestic currency goes down.

Discuss ANY FIVE (5) arguments for and against the use of trade barriers by the government of your country

1. FOR THE USE: Stimulating production and increasing employment. Proponents of protectionism argue that import restrictions are necessary, first, in order to support domestic producers, preserve jobs and thereby ensure social stability. Secondly, the reduction of imports increases the aggregate demand in the country, which stimulates growth in production and employment.
2. FOR THE USE: Protection of young industries. The argument is that protectionism is temporarily urgently needed to enable young promising industries with high levels of spending to be formed, consolidate their positions. As soon as their effectiveness begins to increase, the level of protectionist protection can be reduced.
3. FOR THE USE: Ensuring economic security and defense of the country. The argument in favor of protectionism in the sectors that manufacture strategic and military products is not economic, but rather military-political. It is alleged that the country's excessive import dependence can put it in a state of emergency in the event of emergencies.
4. AGAINST THE USE: Aggravation of interstate contradictions. More often than not, the protectionist policy pursued by one country leads to the adoption of appropriate measures by its trading partners.
5. AGAINST THE USE: Reduction of exports and deterioration of the balance of payments. Protective trade policy, by reducing imports and increasing net exports of the country, inevitably affects the level of the exchange rate of the national currency, leading to its increase.