GEOG10-MIDTERM

GEOG10-MIDTERM - 1 2) ECON OMIC T RAD E- 0FFS - DEV ELO PM...

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Birdie 2) ECONOMIC TRADE-0FFS -DEVELOPMENT IN THE AGE OF GLOBALIZATION ‘A country has a comparative advantage in those goods that are intensive in that country’s relatively abundant factor ‘—Heckshcer-Ohlin In attempting to analyze how exactly a developing economy will go about attracting foreigners to its exports, it is extremely important to keep in mind the complex global web that we are functioning within, and thus, the country’s internal economic state and the global economy to a great extent become interdependent in the analysis. First I will outline the strategies a government can utilize to encourage exports and their economic effects primarily in terms of the developing economy’s internal economy; and then bring in the international dimension to the discussion. A depreciation in the exchange rate of a developing country will have the effect of lowering the external value of the currency and thus enabling exports to be more competitive in foreign markets, this can be achieved (amongst other means) via a lowering of the interest rates in the economy. Firstly, a low exchange rate means that foreigners can now get more of your currency than before for one unit of theirs. A simple example, before depreciation an American could purchase 25 Thai Baht’s with $1, now $1 will buy you 50 Thai Baht. Thus noodles costing the American tourist $1, now only cost him 50cents.Decreasing interest rates in the economy can bring about this effect. Since the external value (exchange rate) of a currency on the foreign exchange market is governed by the forces of demand and supply, a low interest rate (in the absence of offsetting factors) will lead to a
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GEOG10-MIDTERM - 1 2) ECON OMIC T RAD E- 0FFS - DEV ELO PM...

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