Exchange Rate And Growth

The volatile and sharp movement in exchanges rate hampers the proper working of the trade and world economy Rangraian (1986).These changes triggers rise in risk premiums by banks and traders in order to manage sharp exchange rate fluctuation at one hand and on the other price of international commodities and goods also increases. The direct impact of sharp changes in exchanges rate on trade volumes is not very large Gogon (1993) and Bayoumi (1996).Other researchers like Gothur (1985) highlighted that the relationship between volatile exchange rate and trade is does not highlights large significance however there is some indirect impact of such fluctuations on trade due to changes in prices .Similarly scholars such as Bailey ,Travels and Ulan (1986),Bacchetta and Wincoop (1998) and Devereus and Engel (2002) also highlighted association between exchange rate and trade volume as insignificant, though the volatility result in reduction of imports ,however there is no strong association between exchange rate fluctuations and trade Korey and Lastrapes (1989).The fluctuations in exchange rate increases the opportunities to increase the exports in the global market. This volatility also increases the gains that can be derived from international trade making production a more profitable initiative. Such exchange rate fluctuations .The larger the intensity of exchange rate fluctuations the higher would be the risk faced by international firms which will result in reduction in volume of international trade and production. The intensity of effect of this exchange rate on production and international trade volumes is also dependent of level of risk aversion taken by the firm Broll and Eckwert (1999).
In order to analyze the outcome of inflation, the real effective exchange rate (REER) is used which is the result of weighted average score of a country currency relative to basket which contains several currencies of the world in order to examine the effect of inflation in a more profound manner. In This REER model the relative trade balances are given large importance in order to derive the weights for evaluating different currencies of the world. The currency value of any given country in relation to other major currencies prevailing in the market in this index was derived by the exchange rate which is adjusted in order to manage the effects of inflation (Investpodia, 2007).The REER model serve as an indicator to examine the trade competiveness as well response of Pakistan rupee against other currencies to (GOP,2006 ) .The REER model incorporates nominal exchanges rates ,subsidies given to traders ,Tariffs and Prices prevailing in local and international market. The changes that prevails in country competitive position land scape in relation to its trading partners are visible in REER model (Ahmed,2000). The determinants of inflation in Iran from short and long term perspectives was examined by Bonato (2007).The basic function of this approach was largely focused towards in examining the relationship that prevails between nominal variables and inflations as compared to studies that was inclined towards using traditional approaches which incorporates demand function in order to highlight real money balances .The studies highlighted that long term relationship exists in money and price levels as well as rate of return and exchange rate in addition to real .According to Khan &Ali (2011) the determinants of the price was no single variable, for example the surge in prices of real city in Quetta city of Pakistan were based on number of factors such as Urbanization, Refugee influx, lack of investment opportunities in other areas and large inflow of remittances from abroad.
Since the effect of sharp changes in exchange rate for determination of international trade flow is under discussion, the literature highlights a generally agreed view regarding the empirical v relationships that prevails among these two variables. There is large amount of literature available that highlight the extent of significance of relation between changes in exchange rate and nature of international trade flow among countries. Some of the studies that can be quoted in this context are which are of the view that that the fluctuations that occurs in exchange rate result in reduction in trade flows were given by Cushman (19,20,21),Akhtar and Hilton (22) ,Kene and Rodrick (23).However studies such as Hooper and Kohlhagen (18) and Assery and Peel (24) have provided a different view and does not support the validation of hypothesis that exchange rate result in reduction in international trade flows. In the context of of developing countries there exists a negative relationship between above variables Grobar (25).Researchers such as Baldwin (26) and dixit (27) also highlighted lack of symmetry among rate change and performance of exports.
Pakistan falls in the domain of developing country exports and imports play a very much significant role in the development phase, its imports have increased with the passage of time ,in order to manage these imports there was no effective foreign exchange reserve management policies (Chaudry and Abe,1999) leading to higher level of instability. The major source of foreign exchange earnings is remittances which have been excessively over utilized with the passage of time (Economic survey ,2001).There is large fluctuations in trade especially in export growth during different periods of time. The effect of such fluctuations affected number of areas such as domestic savings and investment which in turn affected the overall economic growth scenario of the country. Such impacts have not been studied very comprehensively in literature. In order to analyze such issues, number of sections has been developed in this study, Section 2 consists of concise analyses of literature and theoretical foundations. The impacts of instability in exports on different macro economic variables have been studied in Section 3.In section I conclusions and policy implications of this study is provided.

Increase in foreign exchange reserve increases the capital formulation in the Pakistan. Instability related to export proceed was not found significant that did not effected the growth , in addition it does not affect capital formulation. In addition, to foreign exchange reserve other variables such as gold and import capacity have also contributed to the level of output in the country. The result highlighted that export instability have not effected the imported capital good and household Investment in Pakistan. These finding helps to understand the relationship that exists among export instability and economic growth. It was also highlighted that the international reserves are very much significant that effect number of activities, thus constant initiatives should be taken in order to maintain reasonable level of reserves. The deficit related to trade is largely funded through international borrowing. Imports are also important in this context as increase in import of capital goods helps to increase the production activities in the country. The levels of import stability in relation to foreign exchange reserves are very much significant for smooth economic growth. Thus, commercial policies should be inclined towards maintaining a balance between essential imports and foreign exchange reserves.

Overcoming the overvaluation of the currency in order to have smooth economic growth is of the strongest initiatives that have been supported by number of researches whose evidence can be supported from findings of different country statics (Razin and Collin 1997,Johnson Ostry and Sub Ramanian 2007).The findings of the different research papers developed by Dollar (1992) and Sachs and Warner (1995) that was focused on examining the relationship that exists between outward orientation and economic growth rest largely on indices that examines the extent of overvaluation(Rodriguez and Rodrik 2001).Large number of this literature that focus on cross national policy regressions these days are in disrepute (Eastern 2005 and Rodrick 2005 ).According to Easterly (2005) highlight that overvaluation have negative effect on economic growth. The reason that support this regularity is not constantly theorized clearly, most of which are largely inclined towards making macroeconomic instability responsible (Fisher,1993).The exchange rate which are overvalued results in number issues such as lack of availability of foreign currency ,increase in current account deficit ,rent seeking, adverse balance of payments fluctuations in macroeconomic cycle

Different policies such as fiscal, capital account and intervention policies are some of the significant polices in this context. The movement in exchange rate in principle requires adjustment in real quantities as well, however polices that impact magnitude is not very large are also useful in restoring balance. One of the most significant findings of the literature that focus on open economy is that nominal exchange rates and real exchange rate move closely to each other, however there are some exceptions in this context. According to Levy Yeyati and Sturzenegger (2007) suggest that sterilized intervention can adjust the real exchange rate in short and medium run. Thus developing our analyses based on changes in exchange rate management policies seems reasonable.
.

Population and Growth
According to While Dyson (2010) is of the view that mortality decline is the main factor responsible for economic development, Mckeown (1976) is of the view that we need to alter the direction of causality i.e the increase in the standard of living is responsible for lower death rates.
Researcher such as Easterline (1996) and Schofield and Reher (1991) highlighted that higher standard of living that was result of industrialization in cities of Europe in nineteen century might have resulted in increase in mortality rates. However the evidence derived from the developing economies highlights that it is the decline in mortality rate that have lead to economic growth, as it is responsible for triggering the increase in physical and human capital due to increase in saving and education Bloom and Canning (2001) and Kalemli Ozcan (2002).In addition there is decline in mortality rate due decline in death rates due to various contagious diseases. Decline in the death rates due to such diseases have increased the nutritional health status of children as a result more healthy labor force is available for future. Strauss and Thomas (1998) are of the view that healthier workforce result in higher level of productivity. In pre transitional societies the increase in population resulted in lower level of standard of living as the extent of technical innovation in agriculture limited as a result productivity remains lower Maltus (1798, 1830, 1970).It was the influence of this concept that Clark (2007) highlighted that income levels that prevailed in the nineteenth century were not able move away from Malthusain equilibrium as the technological advancement in such economies were not very high. Other school of thought such as Neutralist or Revisionist are of the view that increase in the population of the developed countries in tweentith century have not significnalty increased the per capti GDP growth Kuznets (1967), Kelly ()1988 and Mcgreevy (1994).According to Simon (1981,1989) are of the view that increase in population growth will have positive influence on per capita GDP in the long run by increasing productivity by focusing on generations of new ideas and learning initiatives. However there is growing consensus that prevail these days that increase in population negatively effects the economic growth in the countries which was highlighted by Birdsall and Sinding (2001),Barro and Sala Martin (2004),Sachs (2008) and Headley and Hodge (2009).The evidence generated from recent experience have indicated a decline in fertility in developing countries that falls in geographic locations of Asia and Latin America have resulted in reduction in country dependency ratios ,which in turn have lead to increased economic growth due to higher number of savings and investment in the fields of physical (public goods )and human capital which includes initiatives such as higher educational and training opportunities for every individual worker especially for a extended period which result in increase in labor productivity as a more rapid pace as compared to the human capital pool of dependent people Higgins and Williamsons (1997),Mason (1997)and Bloom and Cannings (2001).As a result of this decline ,these geographic regions are going to witness a rise in old age dependency ratio a situation commonly seen in Europe and Japan Bloom (2009).Thus increase in rate of population ageing will have negative consequence for economic growth .
Thus increase in number of people that belong to aged group is likely to generate negative impact for the country economic growth potential. Issues such as Slums near big urban cities pollution and congestion are result of urban growth in developing countries some times are often termed as engines of growth Jacobs (1972), Crook (1997), and Beal and Fox (2009).The large concentration of population in these cities also result in availability of concentrated markets creating many opportunities to generate economies of scale with respect to product ion and transportation cost involved in this process. The firms settled in urban areas are in a better position to inline their skill labor requirement with the production initiatives, the return derived from infrastructures such as road and utilities is also greater due to concentration of large number of firms in a single area. According to Fox and Dyson (2008) who developed analyses on the data derived from the period since year 1975 and highlighted that there is positive connection among growth in urban areas with per capita GDP.By focusing on the idea that demographic transition has resulted in economic growth, this paper will try to highlight the impact of various dimensions that fall within the domain of transition on per capita GDP growth by analyses of data obtained from a sample obtained from forty three developed countries selected for this analyses (1).5

Theory
In the theory of population dynamics and economic growth Uganda does not fall in the domain of Malthusian trap of population growth leading to severe crises 6, the growth theory highlights that there are serious negative implications of increasing population on per capita economic growth potential of the Uganda.Harrod Domar provided a very simple growth model which focuses on production function that takes into account fixed proportions of factors and marginal rate of return for each of these factors is also constant ,one percentage increase in population will result in decrease in economic growth by one percent 7.The fixe d proportion assumption of model is responsible for generation a lot of criticism for this model as a result it has lost popularity with the passage of time .

Solow developed a neo classical growth model that focuses on creating a differentiation between steady state and transitional effects in any given country. The higher population growth rate in steady state is likely to result in reduction in income per capita, but it is not going to impact the growth of per capita income potential. Thus, in the steady state the economy of the country is like to grow with the population growth, which highlights per capita growth is not related to population growth in steady state. In transition the increase in population is going to effect the per capita income growth. The argument given in the support of negative impact of population growth with respect to income per capita growth in steady and transition has large amount of similarities with the argument in the Harrod Dommar model which highlight that increase in population growth compels the countries to utilize their saving in capital widening instead of capital deepening opportunities 8.The intensity of the impact is not very high as there is a decline in marginal return to capital.

The Beginning Maltus (1798)
The whole debate was started by Reverend Thomas Malthus who provided two different propositions in a research named as First Essay on Population, the first proposition stated that there would be a geometric growth rate in population (e.g.,1,2,4,') the main reason responsible for this would be the lack of conscious restraints exercised by individuals on fertility and the second proposition states that there would be an arithmetic growth rate (e.g.,1,2,4,') with respect to availability of food which is largely due to the diminishing rate of return and limited resources available as land. The outcomes from this situation would be food shortages leading to starvation and deaths. The size of population in the long run would be under the influence of food availability and morality. Increase in population would serve as a restrain in growth in per capita income to lower level which is termed as Maltusian Trap. Maltusian research was not largely supported by the findings of the next centuries as couples were not engage in producing off spring without different types of restraint, instead they were exercising conscious efforts in order to control fertility in accordance to their changing needs and requirements. The issue of supply of food due to limited supply of land does not excessively restrained as technological innovation enabled increased in food production in geographic locations in which Mathus focused in his studies. Food surpluses were also witnessed in some countries forcing government to limit farm production.
Thus the views given by Malthusian with respect to link between growth in population and economic connection were not complete and comprehensive and more profound analyses were needed in this context. The urgency for these types of researches was result of many demographic events. For example in the mid of the 20th century it was revealed that the decrease in the mortality rate and increase in the fertility sustainability were leading to high population growth in developing countries. A major concern that surface in this context was that these rates would be not be sustainable in the long run. In the past the fertility rate have shown a decline, and the outcomes of such declines and its effects on welfare, economic prosperity and the environment and the pace of such events was not very much clear. Consequently Malthusian Problem resurfaces and researches focused on examining population consequences have taken into account different tasks, triggering the need for fresh reassessment initiative in this context

2. Exapnded Elaborations 1950s, 1960,1970s
2.1 The United Nations (1953)

The first study that focused on examining the economic demographic interactions was highlighted in a seminal study (United Nations, 1953) termed as the Determinants and Consequences of Population trends. This research provided a comprehensive and balance view. This study focused on 21 economic linkages with demographics. The study highlighted impact of population on these factors the findings revealed positive impact of some of these factors which was due to the economies of scale whereas negative effect was due to diminishing return, in addition some factors depicted a neutral outcome such as technological and social prosperity concerns. The overall negative impact of related to undetermined size was largely visible in developing countries and UN forecasted diverse nature of effect according to different conditions prevailing in a country.
2.2 Coaleand Hoover (1958)
Second most prominent contribution that focus on assessment of demographic was given by Ansley J Coale and Edgar Hoover (C/H) in the book Population Growth and Economic Development (1958).The findings derived from simulation results that was based mathematical model from Indian data, the researchers highlighted that development and prosperity in India can be significantly enhanced through reduction in population rates. The analyses rest upon two main concepts .The first concept is based on the idea that large the size of family greater would be the impact on its household saving and ultimately saving at macro level, and the government initiatives in this context and its stimulation efforts would not very closely in line with requirement and demands for increased capital in order to mange this population. Secondly, the investment in economy would also be directed away to other social expenditures such as spending on health and education. This shifting of productive investment in other areas was associated youthful age composition that fall in the domain of population groups that have high fertility, population density and growth was not linked to this investment shifting, this research significantly effected us population policy decision making initiatives. This study has also gain popularity among academic scholars due to its inclination on the concept of physical capital as compared to Malthusian orientation towards the concept of land.

Source: Essay UK - http://ntechno.pro/free-essays/finance/exchange-rate-growth.php


Not what you're looking for?

Search:


About this resource

This Finance essay was submitted to us by a student in order to help you with your studies.


Rating:

Rating  
No ratings yet!

  • Order a custom essay
  • Download this page
  • Print this page
  • Search again

Word count:

This page has approximately words.


Share:


Cite:

If you use part of this page in your own work, you need to provide a citation, as follows:

Essay UK, Exchange Rate And Growth. Available from: <http://ntechno.pro/free-essays/finance/exchange-rate-growth.php> [20-10-17].


More information:

If you are the original author of this content and no longer wish to have it published on our website then please click on the link below to request removal:


Essay and dissertation help

badges