Exchange Rates

Exchange Rates Student Name
Institutional Affiliation
Abstract
The analysis highlights the effect of exchange rate on the price of commodities. The rise in the equilibrium rate of exchange affects countries both in Europe and other continents in the world. The changes in the value of the exchange rate affect the purchasing power parity of a given currency. The appreciation of the Euro against the Dollar has resulted to a stronger purchasing in the Euro zone and hence improved growth in the manufacturing companies in the region. The research puts into view the effect of exchange rate change. The paper analyses a recent article on how the increase appreciation of the Euro against the US dollar has led to an improved growth of industry in the Eurozone. Also, the paper evaluates how the depreciation of the value of the US Dollar affects exports in the Euro zone. Further, the paper indicates how the depreciation and appreciation of currencies result to change in the equilibrium rate of exchange. A graphical representation is made to illustrate the changes. Ultimately, the consequences of the study are highlighted.
Exchange Rates
The research puts into view the effect of exchange rates. The article, “Global Economy-Manufacturing vigor remains, strong currencies hinder exports” by Cable and Zaharia (2018) addresses the impact of the increased strength in currencies on exports. It highlights how increased strength of the Euro has hinder export of goods to countries such as Japan from countries such as the United Kingdom.

According to the article, due to the appreciation of the value of the Euro, the performance of the manufacturing industries in Britain has improved (Cable & Zaharia, 2018). The article also indicates that the industries have enjoyed the best performance in a period of two decades as a result of forex exchange price pressures.
On the other hand, the article also highlights how the appreciation of the Euro and hence subsequent depreciation in the US Dollar has led to decreased exports. In the article it is reported how Britain has experienced challenges of exporting their commodities to Asian countries such as Japan and South Korea (Cable & Zaharia, 2018). This is because of the depreciation of the currencies of the respective countries and hence reducing the purchasing power of the countries in the Euro zone.
This is an important topic since the strengthening of the Euro means that the equilibrium rate of exchange is affected. The rise in the equilibrium rate of exchange affects countries both in Europe and other continents in the world (Gordon, 2014). For instance, the UK is the tenth major export economy globally. Therefore, this discussion helps to analyze the challenges and benefits that can arise as a result a shift in the equilibrium exchange rate.
The changes in the value of the exchange rate affect the purchasing power parity of a given currency. For instance, when the price of the Euro appreciated against the US Dollar from the end of 2016 to the beginning of 2018, the Purchasing Power of the Great Britain increased. The appreciation indicated that the UK has a higher ability to buy more goods from the US and hence there was increased imports from US to the UK. However, the depreciation of the US Dollar value translated to a decreased purchasing power in the UK (Gordon, 2014). The UK cost of export increased.
10235865860EQ1
EQ2
S
D1
Quantity of Euro per period
Price per Euro
(Dollars)
1.25242
1.03564
Changes in the quantity of Euros demanded over time
D2
EQ1
EQ2
S
D1
Quantity of Euro per period
Price per Euro
(Dollars)
1.25242
1.03564
Changes in the quantity of Euros demanded over time
D2

The figure above is an illustration of how the equilibrium exchange rate shifted from EQ1 to EQ2 as a result of the increase in the exchange rate of the Euro against the dollar. In late 2016, the price of one euro in US dollars was 1.03564. At the beginning of February 2018, the price had risen to a level of 1.25242 resulting to a shift in demand from D1 to D2 and hence a new exchange rate the equilibrium level of exchange, EQ2. The appreciation of the Euro against the Dollar has resulted to a stronger purchasing in the Euro zone and hence improved growth in the manufacturing companies in the region. On the other hand, the depreciation of the Dollar against the Dollar has made exporting of commodities in European countries such as Britain to other countries such as Japan and South Korea costly. The consequence of the interpretation of this paper is that the supply of the euro currency is assumed to be constant or unchanging. This is not always the case since monetary policy experts from the central banks may opt to pump in money into the system to affect the equilibrium.
References
Cable, J., & Zaharia, M. (2018). Global Economy-Manufacturing vigor remains, strong currencies hinder exports. CNBC. https://www.cnbc.com/2018/03/01/reuters-america-global-economy-manufacturing-vigor-remains-strong-currencies-hinder-exports.htmlGordon, R. (2014). Macroeconomics. Harlow: Pearson.