QUESTION 4 4.1 Differentiate between an exchange rate and the foreign exchange r

Question

QUESTION 4 4.1 Differentiate between an exchange rate and the foreign exchange rate market. 4.2 Explain how changes in exchange rates can influence exports and imports in South Africa 4.3 Discuss ANY FIVE (5) arguments for and against the use of trade barriers by the government of South Africa 4.4 As a result of pressure from the Southern African Clothing and Textile Workers Union (SACTWU), the South African government has decided to increase the tariff on textiles. Explain who would gain and who would lose as a result of the decision taken by the South African government.

Explanation / Answer

Exchange rate is the rate at which one currency is exchanged for another currency. It can be of two types - floating and fixed. Floating Exchange rate is determined in the foreign exchange market through market forces of demand and supply whereas fixed exchange rate is fixed by the government.

Effect of changes in exhange rate on :

1) Exports - A decrease in exchange rate, which means appreciation in the value of domestic currency, will lead to decrease in exports as they will become more expensive in the foreign market due to increase in the value of domestic currency against foriegn currency. Whereas increase in exchange rate, which means depreciation in value of the domestic currency, will increase the exports.

2) Imports - A decrease in exchange rate, which means appreciation in the value of domestic currency, will lead to increase in imports as they will become cheaper in the domestic market due to increase in the value of domestic currency against foriegn currency. And vice-versa.

Use of trade barriers :

FOR - 1) Trade barriers protects the early-stage domestic producers and manufacturers from foreign competition.

2) Trade barriers provides protection to employment opportunities by helping the domestic industries grow without any external competition.

3) Growth of domestic industries results in job creation.

4) Trade barriers helps in improving balance of trade by restricating imports from the foreign countries.

5) Protection from dumping which means selling at lower prices to gain unfair market share. Thus imposition of anti dumping duties takes care of this.

AGAINST - 1) Better and more choices available to consumers.

2) Foreign competition forces domestic industries to produce good quality products so as to gain market share.

3) Consumers get more variety at reasonable prices as the competition gets cut-throat.

4) Trade barriers discourages trade between countries which may hamper their long term relationship. Thus, free trade improves interantional relationship between two countries in the long run.

5) Free trade encourages a healthy competition among the domestic industries so they try to excel by producing better quality for consumers.

Increase in tariffs on textiles - The gaining party would be the textile industry as they will be saved from foreign competition whereas losing party would be consumers as they will get less variety at increased prices due to reduction in imports from outside countries.

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