Exchange Rate
The impact of Vietnam exchange rate’s fluctuation on trade balance
The reduction of domestic currency price may increase the competitiveness of domestic goods. The increase of nominal exchange rate can make the real exchange rate Increase, which will stimulate export and restrict import. It means that the trade balance will be improved. When the rate rises, the price of export is cheaper by counting in foreign currency, and the price of import in domestic currency increases, which is called the price effect. The decrease of exchange rate makes the price of export cheaper, the export volume increase, while the import volume limit. This phenomenon is known as the volume effect.
However, the deterioration or improvement of trade balance depends on which is more surpassable, price effect or volume effect. * In short run, suppose that the price and wage are relatively rigid in a country, the increase in exchange rate will make export cheaper and import more expensive. For example, because the export contract which had been signed in old exchange rate, the enterprises can not mobilize sufficient resources to produce more than ever before in order to satisfy the increase of export demand, as well as domestic demand increases. In addition, in short term, the import demand does not reduce rapidly also due to consumer psychology. The domestic currency devaluates, the price of imported goods increases; however, consumers may be concerned that there is not the substitutionary domestic goods which have the same quality to exported goods. It leads to that the exported goods demand can not decrease immediately. Therefore, not only does the amount of export in short run do not increase quickly, but also the amount of import does not reduce significantly. Hence, in short term, the price effect is often more superior than volume effect, which causes the deterioration of trade balance. * In long run, the decrease of domestic price can stimulate the domestic production. It
The reduction of domestic currency price may increase the competitiveness of domestic goods. The increase of nominal exchange rate can make the real exchange rate Increase, which will stimulate export and restrict import. It means that the trade balance will be improved. When the rate rises, the price of export is cheaper by counting in foreign currency, and the price of import in domestic currency increases, which is called the price effect. The decrease of exchange rate makes the price of export cheaper, the export volume increase, while the import volume limit. This phenomenon is known as the volume effect.
However, the deterioration or improvement of trade balance depends on which is more surpassable, price effect or volume effect. * In short run, suppose that the price and wage are relatively rigid in a country, the increase in exchange rate will make export cheaper and import more expensive. For example, because the export contract which had been signed in old exchange rate, the enterprises can not mobilize sufficient resources to produce more than ever before in order to satisfy the increase of export demand, as well as domestic demand increases. In addition, in short term, the import demand does not reduce rapidly also due to consumer psychology. The domestic currency devaluates, the price of imported goods increases; however, consumers may be concerned that there is not the substitutionary domestic goods which have the same quality to exported goods. It leads to that the exported goods demand can not decrease immediately. Therefore, not only does the amount of export in short run do not increase quickly, but also the amount of import does not reduce significantly. Hence, in short term, the price effect is often more superior than volume effect, which causes the deterioration of trade balance. * In long run, the decrease of domestic price can stimulate the domestic production. It