Pricing and Exchange Rate in Economics



Pricing and Exchange Rate

PART 1a): Pricing and Exchange Rate

a). Introduction

Business decisions are always made with regard to a cost and benefit analysis. The riskier an endeavor is the less likely it is to be encouraged. However, the higher the plow back the better. The international market is a very lucrative endeavor, it opens a bigger market and more opportunities for a business, but it comes with risks and expenses that the business owner has to meet beforehand (Greuning, 2011). It also has uncertainties that have to be analyzed properly.

 b). The table on Risks and their Weight
Risk Importer Exporter L/M/S How to Overcome It
Economic conditions  Contraction and expansion of businesses cycle Expansion and contraction in production and demand  H  Proper analysis of the industry’s business cycle.
Fluctuations in industry  Changes in market share control  Changes in international trends in preferences and tastes  H  The flexibility of firms and high savings to be used to cushion any changes.
Competition  -increase in cheaper domestically produced goods  -increase in close substitutes produced by other countries but are cheaper.  M  Decrease the cost of production and increase marketing.
Technological change  Use of better and improved technology leads to better quality goods in the international market.  H  Adopting new technology. The firm should be flexible for changes to be put in place.
Change in preferences  Introduction of new goods to the market  L  Adopting the latest trends in the market and incorporating it to the commodities sold.
Costs and expenses  Increase in tariffs and taxes increase the cost of imports  Depreciation of the currency or appreciation of other country’s currency  H  Increase the price of the product.
Regulations  Placement of quotas creates restrictions on imports.  Differences of trade policies between the mother country and the associated country  M  Incorporation of both policies to create a neutral ground. Payment of all quotas and increase in prices.
Expropriation  Untapped opportunities may exist and have not been utilized.  L  All potential opportunities should be properly utilized.
Interest rates  Affects aggregate demand and purchasing power  Affects the rate at which production can be done. Increase in interest lowers production and vice versa is true  M  The firm should learn to depend on equity rather than loans.
Government monetary policy  Affects the quantity of money supply  Affects the rate of investment and expansion of firms  M  Objectives should be set quarterly as per the movement of the business cycle.
Government fiscal policy  Impacts on government role in commercial activities. Mostly taxes for goods  Increases or decreases taxes  H  Look for ways to decrease the impact of taxes on a firm like the use of partnership rather than corporations
Internal and external wars  Creates uncertainty and no imports can take place  Creates instability and exporting to other countries results in losses  H  The firm should not be part of the war and if possible relocate.
The difference in culture and religion  Leads to the adoption of a new culture and new products into the market  Restrictions in terms of the goods to export to other countries.  M  Embrace of diversity and plow on the new opportunities it offers.
Ownership of factories and property  Due processes should be followed for ownership.  All original products should be properly patented  M  Due processes should be followed for ownership of any property. There should be reliable proof.
Human resource restrictions  Decreases the volume to be imported  Allows for outsourcing and decreases the production costs  M  Use capital intensive production methods that do not completely rely on the labor force.
Intellectual property  All distribution process should be legal and should not pose a danger  Adherence to rules and regulations of the international business  L  Exercising of proper ownership rights and the other necessary rights.
Discrimination  Some countries may refuse to sell and the firms at times may make decisions based on stereotypes.  Lack of good relations can lead to poor international relations.  M  Lack of discrimination. The business should be based on equality and equitable distribution of resources and opportunities.
Red tape and corruption  Monetary losses  Monetary losses  H  Use of the Ex-Im Bank as an intermediary
Blockage of funds or capital accounts  Payments are made but goods are not delivered  Goods are delivered but payments are not made  M  Use of Ex-Im Bank as an intermediary
Change in government  Affects trade policies  Affects international relations  M  Create good PR that cannot be affected by government changes.


 c). Governments Take on It

The government will allow the firms to be involved in international business. The country has more to gain from international business. For instance:

– Increase in revenue earned from the emerging markets that offer high returns.

– Exposure to new production methods and an increase in knowledge and skills.

– Improving international relations reduces the chances that the countries will be involved in trade wars and other wars.

– Increase in the GDP: this will increase employment, government investment and aggregate demand and supply (Greuning, 2011).

d). International Impact on Business Reputation

International trade can have a massive impact on the reputation of a firm, but it depends on the activities that the firm is involved in. When a small firm expands by exporting, its products will increase in value domestically, this is because they will be viewed to be of better quality (Greuning, 2011). However when a firm decides to outsource labor and other inputs by moving a plant to another country, then it stands the reputation of losing the domestic market share control.

PART1 b): Decision Making In the Global Economy

a). Introduction

Increasing exports over imports in a country make the net export factor to be positive this means that there will be a trade surplus. This has several advantages as there will be an increase in income, investment and the easily experienced one: an appreciation in the country’s currency.

b). Increase Exports of Small and Medium-sized Businesses

Increasing exports for small size and medium-sized businesses is not an easy thing but with the right resources and programs, it is achievable.

  1. Programs to be put in place to Improve Information

– Since production in terms of volume and frequency from small and medium-sized firms is not substantial, there is a need to encourage the firms to firm an export cartel. This is whereby a firm will be expected to supply a certain volume on an interval basis and they will be put together and exported together. Costs and revenues are divided as per the volume supplied (Hill, 2013).

– The decrease in export tariffs and quotas will also encourage small and medium-sized firms to export more. This will act as an incentive to the producers.

  1. Technical Assistance to be given to first-time exporters

-Training can be offered to the managers and the labor force so that they can be able to compete at an international basis. This will lead to exposure to new methods of production, new technology, and new management skills (Greuning, 2011).

– Introduction to new technology and exposure to international standards of all products.

  1. Government Assistance to New Opportunities

– Through international relations, the government can open expose the firms to new markets in other countries. This can allow for expansion, franchising and even outsourcing to reduce on costs of production.

c).Other Assistance from the Government

The government can subsidize the cost of inputs required by small and medium-sized firms. This can be achieved by setting a criterion to be used to determine small and medium-sized firms and ensuring that production costs are decreased. The firms can also be offered incentives and protection to enter into markets (Hill, 2013).

d). Outline for trade missions

The trade mission should be meant for low and middle-class people. This is because unemployment is more rampant in this population of people. For export to flourish it must be directed towards countries that are easy to access, are stable and have a ready market. This means that the export should be with the emerging markets and mostly in developing countries.

e). Types of Consumers Assistance

Consumers can assist by offering labor and advice. Consumers have lots of knowledge from all the importing they do and they can be able to advise the firms on the best way forward.

f). Impact on Business Costs

Business costs will be reduced drastically. This is because the firms will have access to cheaper inputs and new and cost-effective technology and production methods. At the same time, the production cost is usually subject to the revenue earned: exposure to a bigger market opens an opportunity to increase revenue through higher sales.

g). Banks Role

                     Banks are always known to act as intermediaries between the Federal Bank and the people and between the depositors and those who require loans. They will be encouraged to work as intermediaries and through the Federal Bank: they will be allowed to allow the public to have access to a higher quantity of money but strictly for export investment (Hill, 2013). Interest rates for loans for investment into export will be lower than the rest of the loans advanced to the public.

  1. The Export-Import Bank

The main role of this bank is to finance and act as an insurer for American customers and businessmen. This is because there are many uncertainties when it comes to international trade. The bank acts a cushion that offers assurance that there will be no loss of money. Just like any other bank, it acts as an intermediary, but in this case, it is usually between the exporter and the importer (Merritt, 2006).

All exporters are expected to be registered to this bank as it will handle all their finances after the goods have been delivered to the buyer in good condition.

h). Macroeconomic policies Role

Macroeconomic policies are meant to intercede when the market forces do not bring the economy to equilibrium. They are meant to ensure there is a good economic environment that encourages trade.

  1. Fed Involvement in the Foreign Exchange Rate

The federal bank can be involved in the foreign exchange rate. This is because due to the effect of international trade, the currency can others appreciate or depreciation. When the currency depreciates imports become very expensive when it appreciates exports become expensive and they decrease in terms of demand. This means that the federal bank has to intervene by ensuring that the value of the currency subject to other currencies is at equilibrium (Merritt, 2006). This can be done by buying off the extra dollars or allowing people to have access to more dollars.

  1. Impact of Low-Interest Rates

Low-interest rates encourage investment especially to ventures that have high and medium returns. Therefore they are encouraged, however, lowering interest rates should be done temporarily and in a cyclical trend. This is mainly because low-interest rates discourage savings. Savings form a big share of the reserve that the commercial banks use to loan people money (Hill, 2013). So when the reserve decreases people will not receive the loans. High-interest rates act as incentives for people to save as they know they will earn a high-interest income.

i).Reduction Barriers to Trade

Trade barriers are usually induced by the government in order to control and limit international trade. They lead to economic inefficiency because they increase the cost of either the product or the process of getting the product to the consumer. They include tariffs, taxes, trade licenses, and quotas. All these can be reduced in order to encourage export and can be imposed to discourage import and the objective will be obtained.

j). Impact of Services Trade

Services will be highly encouraged because they are more mobile and easy to replicate in different places. Exporting a service can even be done online, for instance, the sale of software and computer programs are services. Service industries in contemporary society are known to be capital and technology-intensive (Hill, 2013). Exposure to new technology and new methods of production, sale and distribution channels will expand the service industry.

A good example is an online education that takes place at the comfort of one’s home. Access to a bigger market allows for access to more knowledge and new opportunities as well.

k).Achievement of the President’s Objective

The president’s objective is to ensure that employment increases as a result of an increase in the export. This will be achieved because an increase in exports will ensure that there is a trade surplus. Subsidies and incentives offered to small and medium-sized firms will lead to more people opening small firms and exporting or will expand the small firms to require more labor and capital. Both ways there will be an increase in the employment level.

GDP is calculating by adding the value of goods consumed to all the investments made to all government purchases plus the net export factor. Increase in exports makes the net export factor to be positive and increases the GDP as opposed to if it was negative.

l).Risks to Businesses with the New Policy

There are risks that are experienced by the businesses under the new policy. Businesses stand the risk of experiencing the losses attributed to changes in the exchange rate, appreciation or depreciation of the currency will either increase production inputs or decrease the price of the commodities internationally.

m). Other risks to U.S. Fiscal, Monetary, or Trade Policies

– Trade policies of other countries have to be put into consideration; this means that the government has to be flexible to accommodate others and make changes in its own trade policies.

– Fiscal and monetary policies will be put at risk; this is because the decrease in the interest rates in order to allow for investment will lead to increase in the quantity of money circulating in the economy (Merritt, 2006). In order to ensure that it does not result in inflation fiscal and monetary policies have to be employed.

PART 2: Business Strategy

). Introduction

The goal of any firm is to be cost effective at all times. This means reducing the cost of labor and materials and in the long run reducing production costs and increasing profit margin. Outsourcing labor and materials is always a good option for the company; however, it should be done well and should not be based on exploitation (Simon, 1999). If there is a company that knows poor outsourcing can kill a reputation it is the Nike Shoe Company.

  1. b) Benefits and Disadvantages

Outsourcing has several advantages and several disadvantages.

Some of the benefits are:

  • The decrease in the cost of production in terms of labor and materials. This allows for an increase in the quantity produced per unit cost in comparison to the previous cost.
  • Increase in profit margin due to a decrease in production cost.
  • Entry into the global market: this is mostly because outsourcing occurs in another country and it opens up a new market for the goods in that country.

Some of the disadvantages are:

  • It leads to a lack of employee loyalty as they are no longer secure about their position in their jobs. This means they will underperform and can leave at any time and join a competing firm.
  • If the working conditions in the new outsourced place do not meet those of the American labor conditions, then it becomes a negative PR for the company and stands to face a decrease in sales and profits as well (Simon, 1999).
  • Lose of work culture, company signature and loss of quality production is a real risk that is to face. This is unless the senior employees will be relocated to other countries, which seldom happens.


c). Conclusion

Outsourcing labor and other factors of production are not discouraged; however, it should be done with caution as it can lead to heavy losses to the company. Most of the labor-intensive industries find it easier to outsource. My recommendation is based on two parts.

  • If the company decides to outsource to get cheaper inputs, then it should recommend and aid the employees it downsizes for employment elsewhere. This will improve their PR in the country and ensure sales are not affected negatively.
  • If the firm simply requires cheaper labor, it does not have to necessarily outsource, it can use immigrants from other developing countries who are always willing to work for lower pay. Currently, there are close to 10-12 million immigrants per every three years in the country and have no source of income (Smith, 2011). They offer a very big reserve army for unemployed and employers can take advantage of it.

PART 3: Immigration

Immigration occurs when citizens of another country come to the United States mostly due to economic, political or career-related issues. It leads to an increase in population and economically it increases the labor force and the market.

a).Effect of Immigration on Wages Rate

Immigration leads to a decrease in the wage rate. This is because when there is an increase in the labor force, the employers can be able to hold the wage rate as low as possible because they know there is a pool of the unemployed out there. This is what was termed by Karl Max as a reserve army of unemployed (Simon, 1999). The reserve army of the unemployed is willing to work for the lowest amount of pay, this means if the current labor force goes on strike due to low pay or poor working conditions then the unemployed can easily be hired and agree to the conditions willingly.

b).Effect of Immigration on Country’s Output

Immigration increases a country’s output; this is because it increases the labor, the market, innovation, and entrepreneurship. An increase in the labor force enhances labor-intensive production methods. An increase in market increases aggregate demand and supply of commodities. Innovation leads to production and sale of new products and services: and according to Say’s law, the supply of a product comes with its own demand (Smith, 2011).

Entrepreneurship is based on autonomy and independence of people from the corporation and launching to be on their own. It is only possible when there is ease of access to the factors of production.

c).The Advantages of Immigration
  1. Increase in population increases markets. The multiplicity of the needs of a bigger population offer new opportunities for the production and sale of goods and services.
  2. Increases the pool of knowledge in the business industry. This is because different people have different experiences and can be able to see more untapped economic opportunities to be utilized (Smith, 2011).
  3. Reduction in the cost of labor has to be the other major advantage to businesses. This is because immigrants are always looking for jobs and will accept even lower pay.
d).The Disadvantages of Immigration
  1. It leads to an increase in population which allows for faster depletion of resources and scarcity is established.
  2. It leads to a decrease in the wage rate, this reduces the purchasing power of most workers and aggregate demand for commodities decreases as well. This is especially for comforts and luxuries as people are only focused on basic and fundamental commodities.
  3. It leads to the establishment of shanties, ghettos and slum areas where crime, communicable diseases, and poor housing and sanitation are rampant (Simon, 1999). It also leads to a lot of resistance from other employees at the work place. This could lead to the loss of good and well-experienced employees.
e).Sources of Current Political and Economic Issues on Immigration

Politically immigration is on the check because it poses as a security breach. Terrorism, drugs and illegal firearm trafficking. This increases the crime rate and leads to the violation of people’s health. Borders have to be closely monitored and trade between the United States and the nearby countries has been limited. Illegal immigrants are deported back to their countries.

Economically trade treaties have been greatly affected, this is because the borders were once opened between America and Mexico but they are no longer. This means the importing and exporting commodities takes longer and becomes more expensive. On the other side, it has ensured that economic activities are all up to American standards.

 f).The debate surrounding the Dream Act

Dream Act (an acronym for Development, Relief, and Education for Alien Minors) an act based on approval of well behaved high school students who have been in America for more than five years to become legal citizens. Currently, it is being revised because there is a need to keep control of population growth (Smith, 2011). A high rate of population growth is highly discouraged because it is expensive for the government to cater to all people equally.

With increases in older people due to improved health facilities, there is a need to ensure that the population growth rate does not outdo the economic growth rate.



Greuning, H., & Terblanche, S. (2011). International Financial Reporting Standards, World Bank Publications

Hill, W. L. C. (2013). International Business: Competing in the global marketplace. New York, NY: McGraw-Hill/Irwin.

Merritt, J. (2006, March). Regarding reauthorization of the Export-Import Bank of the United State, Small Business Exporters Association

Simon, L. J. (1999). The Economic Consequences of Immigration, Colombia Publishers

Smith, L. C. (2011). Impact of Low Skilled Immigration on the Youth Labour Market, Pauline’s Publishers


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