World Trade and International Finance
World Trade and finance – Exchange Rates analysis
If Seagram should import a year’s supply of French Francs, there would automatically be a dramatic increase in the availability of francs in the market. This availability would mean that the supply of francs would have outweighed the demand of the same in the market. In the absence of intervention from the government, the currency would ultimately be vulnerable to the dictates of the market forces of supply and demand. This purchase would create a relative scarcity of dollars a compared to francs and thus lead to a demand of it, so as to balance the currencies in the market.
The value of the dollar would rise against that of the French franc and the latter would loose much of its purchasing power. If the proportionate ratios between the two countries would become unmanageable for beneficial trade the central bank would be forced to intervene by buying up the excess French currency to restore balance in the market. The overall effect of introduction of excess francs in to the United States would lead to a reduced value of the franc in comparison to the dollar.
The acquisition of Boeing 747s by Korean Airlines automatically seems like a step in the right direction I terms of growth of transport infrastructure in the country and development in the transport system. Such events tend to instill hope in people concerning the economy this also fosters confidence which in turn encourages growth in investment and the growth of economies. This would then lead to a stronger currency in that a country. The fact however that such a purchase would be made possible by debt financing from the United States export and import bank introduces a new variable in terms of payment of debt in dollars. This debt would drastically raise the value of the dollar against the Korean currency. The exchange rate would then rise I favor of the America dollar as compared to the Korean currency. The large debt will lead to the weakening of the Korean currency.
Capital flight refers to a situation where investors pull their investments out of foreign lands because of country-specific risks or the allure of better return of investments in other countries. Capital flight worsens with worsening conditions in countries.
Capital flight may occur due to the manipulation of a currency by government regulations, controls and taxes so as to lower return in domestic investments. The devaluation of currencies also leads to capital flight if it results in lower returns for domestic investments. A country’s increase in external debt is also a factor that may result in the weakening of its currency. This may then result in an unfriendly environment to domestic investors by decreasing in creasing costs. Capital flight will then usually occur as investors seek more stable currencies. The instability of economies almost always leads to the withdrawal of investors in a country as they seek to protect their investments. They opt to take their investments to more stable economic areas. The artificial manipulation of the currency by the government, though the manipulation of the forces of demand and supply results in instability of the currency which holds potential losses for investors. This usually causes capital flight as investors seek to protect their money. When countries are tied up by economically unfriendly ideologies such as socialism which creates unfriendly investor environments, capital flight usually almost immediately results. This is because it reduces currency profitability and increases the unpredictability of events. In the same light, investor-unfriendly political regimes that present a lot of political risk and political instability usually result in capital flight as investors run away from impending unrest and to protect their investments from being destroyed. A general trend of unwillingness of citizens to invest in their own country usually results in lack of confidence in foreign investor and leads to capital flight. This is because it is perceived that citizens of a country understand it more than foreigners. In the same regard, the culture of people in different countries in relation to business also some times affects capital flight. A nation where there is a general lethargic trend in business for instance would not encourage the retention of foreign investors. The lack of favorable trade incentives in a country by the government also many times result sin capital flight, where the investors are not maximizing on profitability due to unfavorable business environments.
References
Epstein, G 2005, Capital Flight And Capital Controls In Developing Countries
, Edgar Publishing, North Hampton.
