Sample Economics Paper on Open Economy Activities

Gains and Losers in Open Trade

Trading is one of the main methods that most countries have over the years utilized to raise revenue and also increase their interaction with international community. When an economy opens for business, firms are free to import and export products without tariff barriers. This trade increases imports and exports in the country, leading to reduced prices of commodities in the market. Various stakeholders benefit from open trading in an economy. Exporters with high capital for example, gain from the trade as they are more competitive to conduct their business with other sellers in the industry (Hornork et al. 1). The export and import firms create employment opportunities, thereby helping to reduce unemployment. Additionally, consumers benefit from cheaper products due to high import prices leading to a variety of goods to choose from. Businesses gain more revenue from their sales, leading to an increased gain in the economic welfare of the country. However, several groups of individuals lose from open trade as businesses with low capital get unfair competition from large and well-established firms for trade. Workers from these uncompetitive firms in the industry may lose jobs due to losses made from low sales from local consumers.

Determinants of Exchange Rate

Exchange rates of a country’s currency are determined by the rate of supply and demand for commodities for which the country exchanges in the market. In the short run, exchange rates are determined by the demand and supply of products, services, and investment priced in a particular currency (Douglas 67). The speculation on the future demand of the currency is significant in determining the direction of the exchange rate. Additionally, the central banks can occasionally buy foreign currency to influence the exchange rate through increasing or decreasing interest on loans and capital for investment (Phuc et al. 2). In the long run, the exchange rates is determined by the purchasing power parity, demand for imports and exports the presence of trade barriers and the difference in productivity levels.

 

Work Cited

Douglas, William A. “Free Trade Agreements and Offshoring.” Challenge 61.1 (2018): 68-84.

Hornok, Cecília, and Miklós Koren. “The case for free trade.” (2016).

Phuc, Nguyen Van, and Vo Hong Duc. “Macroeconomics determinants of exchange rate pass-through: new evidence from the Asia-Pacific region.” Emerging Markets Finance and Trade (2019): 1-16.