international trade and policy complete note The Rise of International Trade Advantages and disadvantages of International Trade etc

3. international 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.

4. The 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.

5. Cont…
• 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.

6. Advantages of International Trade:
• A country may import things which it cannot produce
International 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 resources
International 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 consumer
Imports 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.

7. Advantages of International Trade:
• Reduces trade fluctuations
By 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 produce
International trade enables different countries to sell
their surplus products to other countries and earn
foreign exchange.
• Fosters International trade
International 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.

8. Disadvantages of International Trade:
• Import of harmful goods
Foreign 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 resources
International 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 Specialization
Over Specialization may be disastrous for a country. A
substitute may appear and ruin the economic lives of
millions.

9. Disadvantages of International Trade:
• Danger of Starvation
A 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 Another
One 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 war
Foreign 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.

10. standard 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,

11. 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

12. 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

13. ENTRY 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 goods
b. Exporting and importing of services
c. Licensing and Franchising
d. Turnkey operation
e. Joint Ventures
f. FDI & FII
g. Mergers & Acquisitions

14. 1: 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

15. Cont…
• 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.

16. 2a : 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.

17. Licensing :
• 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

18. 2.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

19. FRANCHISING
• 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

20. 3: 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.

21. 4: 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.

22. 5a: 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.

23. 5b: 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.

25. 6: 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

27. Classical 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.

28. Cont…
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.

30. Cont…
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 labour
this 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 .

31. Economic 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.

32. •

35. Factors 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

36. Cont….
• 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

38. UNIT--4
International Trade Policy
•

39. Protectionism & 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.

40. Dumping
Dumping 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:

41. Types 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.

42. Type of Tariff barriers
1. Import Duties.
2. Export Duties.
3. Transit Duties.
4. Countervailing Duties.
5. Anti-Dumping Duties.

43. TYPE OF NON TARIFF BARRIERS
1. Import Quotas
2. Voluntary export restraints(VERs)
3. Export subsidy
4. Countervailing duty
5. Govt procurement
6. Customs valuation and classification
7. Import licensing procedures
8. Local content regulations
9. Technical barriers

44. 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.
•

45. TYPES OF IMPORT QUOTAS
1.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.

46. VOLUNTARY 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.

47. 3: 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.

48. 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

49. Unit--5
Economic Integration
•

50. Introduction
• 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

51. Economic 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

52. Levels Of Regional Economic
Integration:
• 1.Free Trade Area
• 2. Customs Union
• 3.Common Market
• 4. Economic Union
• 5. Political Union

53. •

54. Preferential 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.

55. Free 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).

56. Examples of FTA

57. Customs 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.

58. Customs Union EXMPLE

59. Common 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)

60. Economic 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

61. Political 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

62. The 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

63. Why 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.

64. GOVERNANCE
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 Union
7. European Court of Auditors

65. The 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

67. Balance of Payments and Foreign
Exchange rate
•

68. Balance 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.

69. Types of BOT
• Surplus/favorable (exports exceed imports)
• Deficit/unfavorable (imports exceed exports).
• Equilibrium((imports equal exports).

70. Factors that can affect the balance of
trade
a) cost of production
b) availability of raw materials
c) Exchange rate
d) 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;

71. Balance 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.

72. Factors 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

73. Components of BOP

74. 1: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.

75. 2: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.

76. 3: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.

77. Disequilibrium 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.

78. Causes 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

79. Correcting 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.

80. BOP vs. BOT
• BOP
1. 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 BOP
a) Conditions of foreign lenders.
b) Economic policy of Govt.
c) all the factors of BOT
• BOT
1. 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 BOT
a) cost of production
b) availability of raw materials
c) Exchange rate
d) Prices of goods manufactured at
home

81. Foreign 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.

82. Types of Exchange Rates?
Spot Rate
Forward Rate
Buying & Selling Rate
Floating Exchange Rate
Fixed Exchange Rate

83. 1. 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

84. cont…
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.

85. Cont…
• 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.

86. Cont…
• 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

87. Factors 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

88. Appreciation & 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