Economic Impact On Domestic And International Prices

Since many of us inhabit one area on a day to day basis, the relative price of goods and services appears fairly stable. Whether that’s the cup of coffee you pick up every morning or the paycheck you receive every two weeks, the value rarely ever changes. However, in reality, currency fluctuations occur every second and have various economic implications. The textbook case shows that an exchange rate shocks impacts inflation, interest rates and of course trade, just to name a few. Beyond directly influencing different economic channels, FX shocks have policy implications which are not as easily understandable. If exchange rates cause changes in import prices and domestic inflation, then subsequent monetary policies should be put in place. Following the work of various economic research, theory has rarely reflected reality when predicting exchange rates influence on domestic and international prices. Economic Theory Flashback to your macro 101 class and you know that exchange rates effects a number of outcomes in the global economy. Most importantly, exchange rates affect inflation through a number of direct and indirect channels. If the U.S. dollar appreciates, this directly causes the price of imported goods to decline. Conversely, a higher exchange rate makes it harder to export goods overseas. Since commodities are quoted in U.S. dollars, any domestic exchange rate shocks also impact the commodities market. Like exports, a stronger dollar makes it more expensive forShow MoreRelatedThe Costs Associated with International Quotas and Other Trade Restrictions1552 Words   |  6 PagesEconomics in International Business What are the Costs Associated with International Quotas and other Trade Restrictions? Introduction There are many different policy tools that can be used to apply limitations on international trade. 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