discuss and explain 1- What are the functions of the foreign exchange market? Wo
ID: 397801 • Letter: D
Question
discuss and explain
1- What are the functions of the foreign exchange market? Would international commerce be possible without its existence?
2. Describe the concept of regional economic integration. Do you believe that regional economic integration is a good thing? Explain your answer.
3. What is the difference between a free floating exchange rate and a managed or dirty float system?
4. What is meant by the term Foreign Direct Investment? Describe the difference between the flow of foreign direct investment and the stock of foreign direct investment.
5. Please briefly explain the following forms of economic integration: free trade area, customs union, common market, economic union, and full political union. Provide an example of each form of economic integration.
Explanation / Answer
1) The foreign exchange market is the market for trade of currencies. It is the base on which the international trade depends. It supports imports and exports. With the ability to trade in different currencies companies are able to grow globally. Through foreign exchange market only, participants transfer purchasing power between countries, obtain or provide credit for international trade, and minimize exposure to exchange rate risk.
2) Regional economic integration is the agreement between counties in a geographic region to promote trade of goods and factors of production between countries and remove tariff and non tariff barriers. For example the North American free trade agreement is the regional economic integration between United States, Mexico and Canada. The main disadvantage of regional economic integration is that Countries may move production to cheaper labor markets in member countries and workers may move to gain access to better jobs and wages.
3) In free floating exchange rate there is no intervention from government. The rate of exchange is determined by interaction of demand and supply forces. in managed float he government and central banks of the country intervene and help to set the exchange rates so there is less volitatility of exchange rates in this case.
4) Foreign direct investment is the investment made by one country into business in another country. In some cases an investor acquires foreign business assets, including establishing ownership. The flow of FDI is the amount going over a period of time. The stock of FDI is the total accumulated value of assets at one time.
5) Free trade area- eliminates trade barriers between member countries. For example NAFTA
- Customs union-it adopts a common external trade policy while eliminating trade barriers between member countries .for example an Andean community
A common market is featured by a free movement of the factors of production and goods and services. For example MERCOSUR
An economic union- in addition to above it is characterized with common currency, harmonized tax rate and a common monetary and fiscal policy. For example the European Union.
A full political union- it has a central system that coordinates the economic, social, and foreign policy of member states .like in EU.
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