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International finance Assignment1

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What are the main factors affecting the relative prices of goods? Such effect can induce changes in exchange rates and deviations from purchasing power parity. Do you agree? These changes may create a correlation between the exchange rate and the terms of trade. Can governments engage in foreign exchange market operations to exploit this correlation and affect the terms of trade? Discuss the above with relevant examples and research....

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Question Preview:

What are the main factors affecting the relative prices of goods? Such effect can induce changes in exchange rates and deviations from purchasing power parity. Do you agree? These changes may create a correlation between the exchange rate and the terms of trade. Can governments engage in foreign exchange market operations to exploit this correlation and affect the terms of trade? Discuss the above with relevant examples and research.

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There are a number of factors that are responsible for affecting the relative prices of goods. These factors are such that cannot be ignored and must be taken seriously in order to fix the prices of the commodity healthily. The first factor is foreign exchange rate. We know that the exchange rate keep on changing with the economic changes of the nation itself. The Gross Domestic Product, Per Capita Income and national growth are primarily responsible for changes in the economic development in the nation. Each country has a different currency that operates within the boundary of the nation. However, these currencies have their own value with the help of which other country’s currency can be purchased. Now the purchase rate or in other words, what we call exchange rates are mainly decided based on the flow of that particular currency within the country. Therefore, in the language of economics, it is understandable that the more a currency flows, the higher the chance will be the currency would degrade. Some of the other factors are competitiveness in the market, customer satisfaction rate, per capita income, economic growth of the nation etc. And, the most important factor is demand of that class of goods plus the demand as well as the performance of the whole industry. Explaining the concept of competitive market- A market set up can be monopoly, duopoly, and oligopoly. Perfect competition is of another type. In the competitive market, altering the prices is not very much possible. Since high level of competition prevails there. No seller can modify the price as long as he is dealing in homogenous products. But, at the same time, if we consider real life situation, then, we will find that fully homogeneous products are almost nonexistent for that matter. Suppose we are taking an example of body soaps. If we consider just the body soaps, then it will appear to us that all brands produce identical products. But, on deeper analysis, we will observe that each of the brands is different. Some produces jasmine flavored soaps, some produces glycerin soaps etc. 

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