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Driven by entrepreneurship and innovation the nations

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Driven by entrepreneurship and innovation The nation’s central bank regulates the money supply, issues currency and manages the exchange rate, to accommodate economic growth Market psychology refers to investor behavior, such as herding behavior or momentum trading. International Business: The New Realities 11-8
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Factors that Influence the Supply and Demand for a Currency (cont’d) Inflation refers to increases in the prices of goods and services; thus, money buys less than before. Some countries (e.g., Argentina, Israel, Russia) have experienced hyperinflation . High inflation erodes a currency’s purchasing power. Interest rates and inflation are positively related; high inflation forces banks to pay high interest. That is, investors expect to be compensated for inflation- -induced decline in the value of their money. International Business: The New Realities 11-9 Example: If inflation is 10%, banks must pay more than 10% to attract deposits.
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Factors that Influence the Supply and Demand for a Currency (cont’d) 5-10 Government action – governments intervene to influence the value of their own currencies, e.g., the Chinese government regularly intervenes in the foreign exchange market to keep the renminbi undervalued, to help ensure exports. Balance of payments is the nation’s balance sheet of trade, investment, and transfer payments with the rest of the world. It represents the differ- ence between the total amount of money coming into and going out of a country.
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Value of the Currency and Trade Surplus vs. Trade Deficit 11-11 Trade surplus – exports exceed imports; may result when the exporter’s currency is undervalued, as in China’s official policy regarding its currency. Trade deficit – imports exceed exports; the government may devalue the nation’s currency to correct a trade deficit. Balance of trade – the difference between the value of a nation’s exports and its imports. Example Japan exports cars to the U.S. Car importers in the U.S. pay exporters in Japan, resulting in a surplus item in Japan’s balance of trade and a deficit in the U.S. balance of trade. If the total value of U.S. imports from Japan exceeds the total value of U.S. exports to Japan, then Japan will have a trade deficit with the U.S. What other factors cause trade deficits? What other factors cause trade deficits?
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Development of the Modern Exchange Rate System After the Great Depression and World War II, the world economy and trading system were in a sorry state.
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