Niaz Sahil

Kabul Universit

y

2015-16

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Niaz Sahilinternational trade

• The buying and selling of goods and services across national borders is known as international trade. International trade is the backbone of our modern, commercial world, as producers in various nations try to profit from an expanded market, rather than be limited to selling within their own borders. There are many reasons that trade across national borders occurs, including lower production costs in one region versus another, specialized industries, lack or surplus of natural resources and consumer tastes.

Niaz SahilThe Rise of International Trade

International trade is important, and, over time, has become more important. There have been three primary reasons for this increase in importance.• First, there have been large reductions in the cost

of transportation and communication. It is now much cheaper to not only operate internationally and trade with foreign partners, but also to exchange information between potential buys and sellers.

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• Second, technological advances have made international production and trade easier to coordinate. More efficient telecommunications, have allowed companies to exchange goods more efficiently and lowered the costs of international integration. Technological advances, have also contributed to the rise in international trade.

• Third, trade barriers between countries have fallen and are likely to continue to fall.

Niaz SahilAdvantages of International Trade:

• A country may import things which it cannot produceInternational trade enables a country to consume things which either cannot be produced within its borders or production may cost very high. Therefore it becomes cost cheaper to import from other countries through foreign trade.

• Maximum utilization of resourcesInternational trade helps a country to utilize its resources to the maximum limit. If a country does not takes up imports and exports then its resources remain unexplorted. Thus it helps to eliminate the wastage of resources.

• Benefit to consumerImports and exports of different countries provide opportunities to the consumer to buy and consume those goods which cannot be produced in their own country. They therefore get a diversity in choices.

Niaz SahilAdvantages of International Trade:

• Reduces trade fluctuationsBy making the size of the market large with large supplies and extensive demand international trade reduces trade fluctuations. The prices of goods tend to remain more stable.

• Utilization of Surplus produceInternational trade enables different countries to sell their surplus products to other countries and earn foreign exchange.

• Fosters International tradeInternational trade fosters peace, goodwill and mutual understanding among nations. Economic interdependence of countries often leads to close cultural relationship and thus avoid war between them.

Niaz SahilDisadvantages of International Trade:

• Import of harmful goodsForeign trade may lead to import of harmful goods like cigarettes, drugs etc. Which may run the health of the residents of the country. E.g. the people of China suffered greatly through opium imports.

• It may exhaust resourcesInternational trade leads to intensive cultivation of land. Thus it has the operations of law of diminishing returns in agricultural countries. It also makes a nation poor by giving too much burden over the resources.

• Over SpecializationOver Specialization may be disastrous for a country. A substitute may appear and ruin the economic lives of millions.

Niaz SahilDisadvantages of International Trade:

• Danger of StarvationA country might depend for her food mainly on foreign countries. In times of war there is a serious danger of starvation for such countries.

• One country may gain at the expensive of AnotherOne of the serious drawbacks of foreign trade is that one country may gain at the expense of other due to certain accidental advantages. The Industrial revolution is Great Britain ruined Indian handicrafts during the nineteenth century.

• It may lead to warForeign trade may lead to war different countries compete with each other in finding out new markets and sources of raw material for their industries and frequently come into clash. This was one of the causes of first and second world war.

Niaz Sahilstandard of living

• standard of living is the degree of wealth and material comfort available to a person or community.

• Or• A standard of living refers to the amount of

material comfort and wealth available to a community,

International Trade and Nation’s Standard of Living

• A nation with a rich human and natural resources and with specialized products can fulfill their own needs an also export to other countries

• Small industrial countries like Switzerland and Austria have very few specialized resources and thus produce and export a much smaller range of products and import the rest

• For developing nations exports provide employment opportunities and earnings for the products they do not produce and for advanced technology that they need

International Economic Theories and Policies

Purpose: • To examine the gains from trade• To study the reasons for and effects of trade

restrictions• To study policies that regulate the flow of international

payments and receipts• To study the effects of these policies on a nation’s

welfare and welfare of other nations• To examine the effectiveness of macroeconomic

policies under different types of monetary systems• Help us to understand the international economic

problems and offer suggestions for their resolution

Niaz SahilENTRY MODES IN INTERNATIONAL BUSINESS

A mode of entry into an international market is the channel which your organization employs to gain entry to a new international market.Modes of entries :a. Exporting and importing of goodsb. Exporting and importing of services c. Licensing and Franchisingd. Turnkey operation e. Joint Venturesf. FDI & FIIg. Mergers & Acquisitions

Niaz Sahil1: Exporting

• Exporting• There are direct and indirect approaches to exporting to other

nations. Exporting is a typically the easiest way to enter an international market, and therefore most firms begin their international expansion using this model of entry. Exporting is the sale of products and services in foreign countries that are sourced from the home country. The advantage of this mode of entry is that firms avoid the expense of establishing operations in the new country. Firms must, however, have a way to distribute and market their products in the new country, which they typically do through contractual agreements with a local company or distributor. When exporting, the firm must give thought to labeling, packaging, and pricing the offering appropriately for the market

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• Among the disadvantages of exporting are the costs of transporting goods to the country, which can be high and can have a negative impact on the environment. In addition, some countries impose tariffs on incoming goods, which will impact the firm’s profits. In addition, firms that market and distribute products through a contractual agreement have less control over those operations and, naturally, must pay their distribution partner a fee for those services.

Niaz Sahil2a : Licensing

• Licensing includes franchising, Turnkey contracts and contract manufacturing.

• In this mode of entry ,the domestic manufacturer leases the right to use its intellectual property (ie) technology , copy rights ,brand name etc. TO A manufacturer in a foreign country for a fee. Here the manufacturer in the domestic country is called licensor and the manufacturer in the foreign is called licensee. The cost of entering market through this mode is less costly. The domestic company can choose any international location and enjoy the advantages without incurring any obligations and responsibilities of ownership ,managerial ,investment etc.

Niaz SahilLicensing :

• Advantages• 1. Low investment on the part of licensor.• 2. Low financial risk to the licensor • 3. Licensor can investigate the foreign market without much efforts on his

part• .4. Licensee gets the benefits with less investment on research and

development• 5. Licensee escapes himself from the risk of product failure.• Disadvantages• 1. It reduces market opportunities for both• 2. Both parties have to maintain the product quality and promote

the product . Therefore one party can affect the other through their improper acts.

• 3. Chance for misunderstanding between the parties• 4. Chance for leakages of the trade secrets of the licensor.• 5. Licensee may develop his reputation

Niaz Sahil2.b: FRANCHISING

• It is a specialized form of licensing.• Under franchising an independent organization called the

franchisee operates the business under the name of another company called the franchisor

• under this agreement the franchisee pays a fee to the franchisor. So the franchisor provides the following services to the franchisee.

• 1. Trade marks• 2. Operating System• 3. Product reputations• 4. Continuous support system like advertising , employee

training ,reservation services quality assurances program etc

Niaz SahilFRANCHISING

• Advantages:• 1. Low investment and low risk • 2. Franchisor can get the information regarding the market culture,

customs and environment of the host country.• 3. Franchisor learns more from the experience of the franchisees.• 4. Franchisee get the benefits of R& D with low cost.• 5. Franchisee escapes from the risk of product failure.• Disadvantages• :1. It may be more complicating than domestic franchising.• 2. It is difficult to control the international franchisee.• 3. It reduce the market opportunities for both• 4. Both the parties have the responsibilities to maintain product

quality and product promotion.• 5. There is a problem of leakage of trade secrets

Niaz Sahil3: Turnkey Project

• Turnkey Project• :A turnkey project is a contract under which a firm

agrees to fully design , construct and equip a manufacturing/ business/services facility and turn the project over to the purchase when it is ready for operation for a remuneration like a fixed price , payment on cost plus basis. This form of pricing allows the company to shift the risk of inflation enhanced costs to the purchaser. Eg nuclear power plants , airports, oil refinery , national highways , railway line etc. Hence they are multiyear project.

Niaz Sahil4: Joint Ventures

• Joint Ventures• Parties to an international joint venture share the

costs and burdens of operations while profiting equally from a market share in both countries. Your partnership will allow you to sell your goods and services in your partner's home country and vice versa. The results include doubled financial power, twice the marketing ability, twice the sales in some cases and entry into a market that might not otherwise be open to you.

Niaz Sahil5a: Foreign Direct Investment

• FDI (Foreign Direct Investment) is when a foreign company invests in India directly by setting up a wholly owned subsidiary or getting into a joint venture, and conducting their business in India.

• IBM India is a wholly owned subsidiary of IBM, and is a good example of FDI where a foreign company has set up a subsidiary in India and is conducting its business through that company. What’s amazing about IBM is that, it is now the largest Indian IT company in India. It is serving Indian customers, and a large domestic market that was not tapped by the Indian players themselves.

Niaz Sahil5b: foreign institutional investors (FII)

• FII) is when foreign investors invest in the shares of a company that is listed in India, or in bonds offered by an Indian company. So, if a foreign investor buys shares in Infosys then that qualifies as FII Investment.

• It is easy to see why you would prefer FDI to FII investments. FDI investments are more stable because companies like IBM set up offices, hire employees, and have a long term plan for the country. IBM can’t just pull out a few million dollars from India overnight, which is what FII investors do from time to time and that leads to market crashes.

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Niaz Sahil6: Mergers & Acquisitions

• :A domestic company selects a foreign company and merger itself with foreign company in order to enter international business. Alternatively the domestic company may purchase the foreign company and acquires it ownership and control. It provides immediate access to international manufacturing facilities and marketing network

Niaz SahilInternational Trade Theories

Niaz SahilClassical or Country-Based Trade Theories

1: Mercantilism• Developed in the sixteenth century, mercantilism was one of

the earliest efforts to develop an economic theory. • This theory stated that a country’s wealth was determined by

the amount of its gold and silver holdings. In it’s simplest sense, mercantilists believed that a country should increase its holdings of gold and silver by promoting exports and discouraging imports. In other words, if people in other countries buy more from you (exports) than they sell to you (imports), then they have to pay you the difference in gold and silver.

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2:The absolute advantage theory.• theory was given by Adam Smith in 1776; according to the

absolute advantage theory each country always finds some absolute advantage over another country in the production of a particular good or service. Simply because some countries have natural advantage of cheap labour, skilled labour, mineral resources, fertile land etc. these countries are able to produce some specific type of commodities at cheaper prices as compared to others. So, each country specializes in the production of a particular commodity. For example, India finds absolute advantage in the production of the silk saris due to the availability of skilled workers in the field, so India can easily export silk saris to the other nations and import those goods in which other countries find absolute advantages.

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Assumption of absolute advantage theory• 1:Trade is between two countries• 2:Only two commodities are traded• 3:Free trade exists between the countries• 4:They only element of cost of production is labourthis theory measures the nation's wealth by the living standards of its people and not by gold and silver.

Disadvantage • If there is one country that does not have an absolute advantage in

the production of any product, will there still be benefit to trade, and will trade even occur?

• The answer may be found in the extension of absolute advantage, the theory of comparative advantage .

Niaz SahilEconomic growth

• Economic growth can be defined as an increase in the capacity of an economy to produce goods and services, compared from one period of time to another.

• Economic growth can be measured in nominal terms, which include inflation, or in real terms, which are adjusted for inflation.

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Niaz SahilFactors affecting Economic Development:

• Inflation distorts business decisions as buying capacity of consumer reduces.

• Tax Levels Income tax and sales tax (eg VAT) affect how much consumer have to spend, hence the demand.

• Interest Rates can impact the growth of an industry. For ex. High car loan interest rate will discourage vehicle industry.

• Governmental Policies provides a friendly environment for businesses to move into and operate within a community

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• Currency Strength is important even for companies that do not import or export goods.

• Government Intervention Many industries are regulated by the government which ensures safety of consumers, employees & natural resources

• Overall Economic Health The economic state of the country and consumer confidence can also spur development or harm it.

• Social and Cultural Values affect economic development through attitude toward progress.

• Foreign Direct Investment

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UNIT--4International Trade Policy

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Niaz SahilProtectionism & Barriers to Trade

• Trade disputes between countries happen because one or more parties either believes that trade is being conducted unfairly, on an uneven playing field, or because they believe that there is one or more economic or strategic justifications for import controls.

• Protectionism represents any attempt to impose restrictions on trade in goods and services. The aim is to cushion domestic businesses and industries from overseas competition and prevent the outcome resulting from the inter-play of free market forces of supply and demand.

Niaz SahilDumpingDumping is an international price discrimination in which an exporter firm sells a portion of its output in a foreign market at a very low price and the remaining output at a high price in the home market .• Objectives of Dumping:• 1. To Find a Place in the Foreign Market:• 2. To Sell Surplus Commodity:• 3. Expansion of Industry:

Niaz SahilTypes of Trade Barriers Trade barriers can be broadly divided into the following

two categories:1. TARIFF BARRIERS Tariff barriers refer to duties and taxes imposed by the

govt on the goods imported from abroad.Tariff barriers restrict imports indirectly.

2. NON TARIFF BARRIERS Non tariff barriers are various quantitative and exchange

control restrictions imposed in order to restrict imports.Non tariff barriers restrict imports directly.

Niaz SahilType of Tariff barriers

1. Import Duties.

2. Export Duties.

3. Transit Duties.

4. Countervailing Duties.

5. Anti-Dumping Duties.

Niaz SahilTYPE OF NON TARIFF BARRIERS

1. Import Quotas2. Voluntary export restraints(VERs)3. Export subsidy4. Countervailing duty5. Govt procurement6. Customs valuation and classification7. Import licensing procedures8. Local content regulations9. Technical barriers

Niaz Sahil 1:Quota

• A quota is a physical quantity limit or maximum amount of a good that can be legally imported over a specific period of time. An import quota implies a fixed quantity or value of a commodity that has been allowed to be imported in the country during a given period of time.

• In practice, quotas may be fixed either in terms of the physical volume or monetary value of imports or a combination of the two.

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Niaz Sahil TYPES OF IMPORT QUOTAS1.Tariff quota: • under this system, a given quantity of a good is permitted to enter

duty free or upon payment of relatively low duty. But imports in excess of that quantity are charged a relatively high rate of duty.

2.UNILATERAL QUOTA: It is imposed without prior negotiation with foreign governments.

3.BILATERAL QUOTA: In this system, quotas are set through negotiation between the importing country and the exporting country.

4.MIXING QUOTA: It is a type of regulation which requires producers to utilize a certain proportion of domestic raw materials along with imported parts to produce finished goods domestically.

5.IMPORT LICENSING: Under this, prospective importers are required to obtain a licence from the proper authorities for importing any quantity within the specified quotas.

Niaz SahilVOLUNTARY EXPORT RESTRAINTS(VERs)

• A VER is an agreement by an exporter country’s exporters or govt with an importing country to limit their exports to it. It is entered into by the importing country when its domestic industry is suffering from large imports.

VERs have been adopted by countries because the use of quotas and tariffs has been forbidden by the GATT(General Agreement on Tariffs and Trade ). But the VERs do not come under the GATT rules.

Niaz Sahil3: Export subsidy

• An export subsidy is a govt grant to an export firm to reduce the price per unit of goods exported abroad. It enables the firm to sell a larger quantity of its goods at a lower price in the export market than in the home market.

4: GOVT PROCUREMENT• Govts discriminates between domestic and foreign

suppliers. The discrimination may be in various ways. In certain countries, there is legislation to buy domestic goods and services even if they are available from abroad at low rates.

Niaz Sahil Embargo:

• Embargo is a total prohibition of trade and commerce with a country. The idea is to economically, financially, socially and politically isolate a country. It has been used by powerful countries to punish a not so strong political opponent.

• If the USA completely stops its trade with Iran, that would be an embargo.

Sanctions:• A lighter form of an embargo is a sanction, which is

a partial restriction on trade and commerce

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Unit--5Economic Integration

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Niaz SahilIntroduction

• Basically there are two approaches to international trade liberalization and economic integration: the international approach and the regional approach.

• The international approach involves international conferences under WTO. The purpose of these international conferences is to reduce barriers to international trade and investment.

• The regional approach involves agreements among a small number of nations whose purpose is to establish free trade among themselves while maintaining barriers to trade with the rest of the world

Niaz SahilEconomic Integration

• A process whereby countries cooperate with one another to reduce or eliminate barriers to the international flow of products, people or capital.

• Regional Economic Integration:Agreement between countries in a geographic region to reduce and ultimately remove tariff and non tariff barrier to the free flow of good, services and factors of production among each other.

• By entering into regional agreements groups of countries aim to reduce trade barriers more rapidly than can be achieved under the auspices of the WTO

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Levels Of Regional Economic Integration:

• 1.Free Trade Area• 2. Customs Union• 3.Common Market• 4. Economic Union• 5. Political Union

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Niaz SahilPreferential Trade Area:

• Preferential trade agreements provide lower barriers on trade among participating nations than on trade with nonmember nations. That is, lower tariffs on imports of each other.

• This is the loosest form of economic integration.

• A good example is the Commonwealth Preference System , which was established in 1932 among 48 Common wealth countries of the British empire.

Niaz SahilFree Trade Area(FTA)

• An agreement between two or more countries to remove all trade barriers between themselves.

• A free trade area occurs when a group of countries agree to eliminate tariffs between themselves, but maintain their own external tariff on imports from the rest of the world.

• Examples of FTA are: The ASEAN Free Trade Agreement(AFTA) and the North American Free Trade Areas(NAFTA).

Niaz SahilExamples of FTA

Niaz SahilCustoms Union

• An agreement between two or more countries to remove tariffs between themselves and set a common external tariff on imports from non-member countries

• Each country determines its own barriers and maintains its own external tariffs on imports against non-members.

• A customs union has common policies on product regulations and movement of factors of productions in goods, services, capital and labor amongst members

• Unlike FTA, members of a customs union have common policies on external tariffs against non-members,

• An example of a customs union is the established customs union between the European Union and Turkey, which came into effect in 1996.

Niaz SahilCustoms Union EXMPLE

Niaz SahilCommon Market:

• An agreement between two or more countries to remove all barriers to trade and allow free mobility of capital and labor across member countries.

• Harmonize trade policies by having common external tariffs against non-members.

• Example is the European Union (EU) previously known as European Economic Community(EEC)

Niaz SahilEconomic Union

• An agreement between two or more countries to remove barriers to trade, allow free flow of labor and capital and coordinate economic policies.

• Sets trade policies through common external tariffs on non-members.

• Integration is more intense in an economic union compared to a common market, as member countries are required to harmonize their tax, monetary, and fiscal policies and to create a common currency

• Example is the European Union(EU) where economic and monetary integration has created a single market with a common euro currency

Niaz SahilPolitical Union:

• An agreement between two or more countries to coordinate their economic monetary and political systems.

• Required to accept a common stance on economic and political policies against non-members.

• Example is US where each US state has its own government that sets policies and laws. But each state grant control to the federal government over foreign policies, agricultural policies, welfare policies and monetary policies. Goods, services, labor and capital can all move freely without any restrictions among the US states and the government sets a common external trade policy

Niaz SahilThe European Union in brief

• The European Union (EU) is an economic and political union.

• It is a unique economic and political partnership between 28 European countries.

• It has delivered half a century of peace, stability, and prosperity, helped raise living standards, launched a single European currency, and is progressively building a single Europe-wide market in which people, goods, services, and capital move among Member States as freely as within one country

Niaz SahilWhy the European Union

The EU’s mission in the 21st century is to: • maintain and build on the peace established between

its member states; • bring European countries together in practical

cooperation; • ensure that European citizens can live in security;• promote economic and social solidarity; • preserve European identity and diversity in a globalized

world; • promulgate the values that Europeans share.

Niaz SahilGOVERNANCE

The European Union has seven institutions: 1. the European Parliament,2. the Council of the European Union,3. the European Commission, 4. the European Council, 5. the European Central Bank, 6. the Court of Justice of the European Union7. European Court of Auditors

Niaz SahilThe EU symbols

• The European anthem • The European flag• Europe Day, 9 May • The motto: United in diversity Founders: France, Belgium, Luxembourg, Italy, Nether lands, Germany

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Balance of Payments and Foreign Exchange rate

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Niaz SahilBalance of Trade • Balance of Trade is simply the difference between the value of

exports and value of imports. Thus, the Balance of Trade denotes the differences of imports and exports of a merchandise of a country during the course of year. It indicates the value of exports and imports of the country in question.

• The balance of trade can be a "favorable" surplus (exports exceed imports) or an "unfavorable" deficit (imports exceed exports). The official balance of trade is separated into the balance of merchandise trade for tangible goods and the balance of services....

• It deals with exports and imports of visible items only.• It takes into account only merchandise exports & imports only.

Niaz SahilTypes of BOT

• Surplus/favorable (exports exceed imports)

• Deficit/unfavorable (imports exceed exports). • Equilibrium((imports equal exports).

Niaz SahilFactors that can affect the balance of trade

a) cost of productionb) availability of raw materialsc) Exchange rated) Prices of goods manufactured at home c)Exchange rate movements;

Multilateral, bilateral and unilateral taxes or restrictions on trade;

Non-tariff barriers such as environmental, health or safety standards;

Niaz SahilBalance of Payment

• Balance of Payment is a system of recording all the economic transactions of a country, with the rest of the world over a period, say one year.

• The balance of a payment is a systematic record of all its monetary transections with other countries of the world in a given period of time. i.e 1 year

• when we say “a country’s balance of payments” we are referring to the transactions of its citizens and government.

Niaz SahilFactors affecting balance of payments

A current account deficit could be caused by factors such as.• High rate of consumer spending on imports

(during economic boom)• Decline in international competitiveness

making countries exports less competitive• Overvalued exchange rates which makes

exports relatively more expensive

Niaz SahilComponents of BOP

Niaz Sahil1:Current Account Balance

BOP on current account is a statement of actual receipts and payments in short period. • It includes the value of export and imports of

both visible and invisible goods. There can be either surplus or deficit in current account.

• The current account includes:- export & import of services, interests, profits, dividends and unilateral receipts/payments from/to abroad.

Niaz Sahil2:Capital Account Balance

It is difference between the receipts and payments on account of capital account. It refers to all financial transactions. • Capital account of BOP records all those

transactions, between the residents of a country and the rest of the world, which cause a change in the assets or liabilities of the residents of the country or its government. It is related to claims and liabilities of financial nature.

Niaz Sahil3:Official Reserve Account

• The official reserve account, a subdivision of the capital account, is the foreign currency and securities held by the government, usually by its central bank, and is used to balance the payments from year to year.

• The official reserves increases when there is a trade surplus and decreases when there is a deficit. Sometimes the central bank will use it to attempt to change the exchange rate to what the government perceives as more favorable.

• records the transactions of the central bank when it buys/sells foreign currencies.

Niaz SahilDisequilibrium of BOP

Disequilibrium occurs when there is either surplus or a deficit in the balance of payments.• A Surplus in the BOP occurs when Total Receipts

exceeds Total Payments. Thus, BOP= CREDIT>DEBIT

• A Deficit in the BOP occurs when Total Payments exceeds Total Receipts. Thus, BOP= CREDIT<DEBIT

Deficit increases the demand for foreign exchange.

Niaz SahilCauses of deficit in the Balance of Payments

• Fall In Export Demand• Growth Of Population • Change in foreign Exchange Rate • Huge International Borrowings • Developmental Expenditures • Demonstration Effect

Niaz SahilCorrecting Disequilibrium

• Monetary Policy- Restricting credit by increasing bank rates which raises exports & reduces imports.

• Devaluation – Value of currency is reduced to make exports cheaper & imports dearer.

• Exchange Control – RBI controlling the flow of foreign currency.

• Fiscal policy – Controlling the export promotion. Import duties(taxes) & quotas.

BOP vs. BOT

• BOP1. It is a broad term.2. It includes all transactions

related to visible, invisible and capital transfers.

3. It is always balances itself.4. BOP = Current Account + Capital

Account + or - Balancing item ( Errors and omissions)

5. Following are main factors which affect BOPa) Conditions of foreign lenders. b) Economic policy of Govt. c) all the factors of BOT

• BOT1. It is a narrow term.2. It includes only visible items.

3. It can be favourable or unfavourable.

4. BOT = Net Earning on Export - Net payment for imports.

5. Following are main factors which affect BOTa) cost of productionb) availability of raw materialsc) Exchange rated) Prices of goods manufactured at home

Niaz SahilForeign Exchange

• Foreign exchange is the mechanism by which the currency of one country gets converted into the currency of another country.

• The conversion of currencies is done by banks who deal in foreign exchange.

• The rate at which one currency is converted into another currency is the rate of exchange between the currencies concerned.

• The banks operating at a financial center and dealing in foreign exchange constitute the foreign exchange market.

Niaz SahilTypes of Exchange Rates?

Spot Rate

Forward Rate

Buying & Selling Rate

Floating Exchange Rate

Fixed Exchange Rate

Niaz Sahil1. Spot Rate:• Spot rate of exchange is the rate at which foreign

exchange is made available on the spot. It is also known as cable rate or telegraphic transfer rate because at this rate cable or telegraphic sale and purchase of foreign exchange can be arranged immediately. Spot rate is the day-to-day rate of exchange.

• The spot rate is quoted differently for buyers and sellers. • For example, $ 1 = Rs 15.50 for buyers and $ 1 = Rs 15.30

for the seller. This difference is due to the transport charges, insurance charges, dealer's commission, etc. These costs are to be born by the buyers

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2. Forward Rate:• Forward rate of exchange is the rate at which

the future contract for foreign currency is made. The forward exchange rate is settled now but the actual sale and purchase of foreign exchange occurs in future. The forward rate is quoted at a premium or discount over the spot rate.

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• 4. Fixed Rate:• Fixed or pegged exchange rate refers to the system in

which the rate of exchange of a currency is fixed or pegged in terms of gold or another currency.

• A fixed exchange rate is one, whose value is fixed against the value of another currency (or currencies) and is maintained by the government. The value may be set at a precise value or within a given margin. If market forces are pushing down the value of the currency, the government will step in and seek to increase its price, either by buying the currency or raising the rate of interest.

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• 5. Flexible/floating Rate:• Flexible or floating exchange rate refers to the system in which

the rate of exchange is determined by the forces of demand and supply in the foreign exchange market. It is free to fluctuate according to the changes in the demand and supply of foreign currency.

• A floating exchange rate is one which is determined by market forces. If demand for the currency rises or the supply decreases, the value of the currency will rise. Such a rise is referred to as an appreciation. In contrast, depreciation is a fall in the value of a floating exchange rate. It can be caused by a fall in demand for the currency or a rise in its supply

Niaz SahilFactors Influencing Exchange Rate

• Impact of Inflation & Deflation• Trends in the balance of trade• Government Budget• Changes in Interest rate• Economic Growth• Speculation• Creditor vs Debtor Nations• Stock Market Operations• Demand & Supply for Foreign Exchange

Niaz SahilAppreciation & Depreciation of Currency

• Appreciation- An increase in the value of the domestic currency with respect to the foreign currency.

• Importers gain from Appreciation of Domestic currency & loose when it depreciates.

• Depreciation- A decrease in the value of the domestic currency with respect to the foreign currency.

• Exporters loose from appreciation and gain from depreciation