Managerial Economics

Managerial Economics generally refers to the integration of economic theory with business practice. It deals with the use of economic concepts and principles of business decision making. Managerial Economics is thus constituted of that part of economic knowledge or economic theories which is used as a tool of analyzing business problems for rational business decisions. Managerial economics can be viewed by most modern economists as a practical application of economics theory in using effectively the firms scarce resources.

Official actions to influence foreign exchange rates

As in some other major industrial nations with floating exchange rate regimes, in the United States there is considerable scope for the play of market forces in determining the dollar exchange rate. But also, as in other countries,U.S. authorities do take steps at times to influence the exchange rate, via policy measures and direct intervention in the foreign exchange market to buy or sell foreign currencies. As noted above, in practice, all foreign exchange market intervention of the U.S. authorities is routinely sterilized–that is, the initial effect on U.S. bank reserves is offset by monetary policy action.

No one questions that monetary policy measures can influence the exchange rate by affecting the relative attractiveness of a currency and expectations of its prospects, although it is difficult to find a stable and significant relationship that would yield a predictable, precise response.… Read the rest

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Determination of Exchange Rates

In simple terms, it is the interaction of supply and demand factors for two currencies in the market that determines the rate at which they trade. But what factors influence the many thousands of decisions made each day to buy or sell a currency? How do changes in supply and demand conditions explain the path of an exchange rate over the course of a day, a month, or a year?

This complex issue has been extensively studied in economic literature and widely discussed among investors, officials, academicians, traders, and others. Still, there are no definitive   answers. Views on exchange rate determination differ and have changed over time.… Read the rest

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Economics of the Foreign Exchange Market

In a floating exchange rate regime the price of the dollar, like any other market-determined price, depends on the relevant forces of supply and demand. But what are the relevant forces of supply and demand in the foreign exchange market?

To try to answer this question, let us consider, for illustration, the factors that determine the relationship between the Australian dollar and the Japanese yen. The Japanese require dollars to pay for their imports of goods and services from Australia and to fund any investment they may wish to undertake in this country. Assume that they obtain these dollars on the foreign exchange market by supplying (selling) yen in return.… Read the rest

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Factors influencing exchange rates

Foreign exchange rates are extremely volatile and it is incumbent on those involved with foreign exchange – either as a purchaser, seller, speculator or institution – to know what causes rates to move.

Actually, there are a variety of factors – market sentiment, the state of the economy, government policy, demand and supply and a host of others.

The more important factors that influence exchange rates are discussed below:

  • Strength of the Economy :The strength of the economy affects the demand and supply of foreign currency. If an economy is growing fast and is strong it will attract foreign currency thereby strengthening its own.
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Indian Perspective on Capital Account Convertibility

Just like in any other country, India’s foreign exchange transactions (transactions in dollars, pounds, or any other currency) are also broadly classified into two accounts, namely, the current account transactions and capital account transactions.

A “current account transaction” could be exemplified where an Indian citizen needing foreign exchange of smaller amounts, say $3,000, for travelling abroad or for educational purposes, can obtain the same from a bank or a money-changer.

On the other hand, a “capital account transaction” involves someone who wants to import plant and machinery or invest abroad, and needs a large amount of foreign exchange, say $1 million.… Read the rest

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Keynesian Theory and Underdeveloped Countries

Lord John Maynard Keynes wrote the General Theory of Employment, Interest and Money as a solution to the problem of periodic unemployment faced by developed industrial nations of the West during the great depression of the thirties. Keynesian theory singles out deficiency of effective demand as the major cause of unemployment and low level of income in industrial economy operations under a laissez faire system. Deficiency of effective demand is a prominent feature of economies undergoing depression and in order to improve the level of effective demand in an economy. Keynes suggested policy measures like cheap money policy, government’s compensatory investment spending, deficit financing and other fiscal methods.… Read the rest

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