By I. Moosa
An excellent consultant with all of the fundamentals to appreciate the several sorts of trade expense regimes and the demanding situations they pose to diversified economies.
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Extra info for Exchange Rate Regimes: Fixed, Flexible or Something in Between
The distribution of income is also affected. If the country has a traditional export sector (for example, agriculture or mining), then a very competitive exchange rate will make traditional exports profitable. There are also implications for the asset markets. When domestic returns are below foreign returns, capital flight will occur, leaving a smaller amount of resources available for domestic investment. Moreover, those who indulge in capital flight (for example, those who can fake trade invoices) often do so at the expense of those who do not (perhaps because they cannot).
For various levels of the exchange rate there are corresponding levels of the domestic price, such that a higher level is associated with a higher exchange rate (given that the foreign currency price is constant). With no change in the foreign currency price, the quantity demanded is not affected, which means that changes in domestic currency revenue result only from changes in the domestic currency price. With a constant quantity, a higher level of domestic currency revenue is associated with a higher level of the 36 Exchange Rate Regimes domestic currency price.
7 shows the case when foreign currency pricing is used but the exporter adjusts the domestic currency price (proportionately or otherwise) to offset changes in the exchange rate. 7 The effect of exchange rate changes on the revenue of an exporter (foreign currency pricing with domestic price adjustment) In this case changes in domestic currency revenue result from changes in both the domestic currency price and the quantity sold. What is important to realize from these diagrams is that fluctuations in the exchange rate cause fluctuations in domestic currency revenue irrespective of the pricing strategy used by the exporter.
Exchange Rate Regimes: Fixed, Flexible or Something in Between by I. Moosa