Name Abigal and Ryan Age: 7 and
1.4.6 How can we characterise and assess the shared values provided by ecosystems?
Export subsidies refer to the financial assistance to industries producing exportable goods. Export subsidies increase exports. As a consequence, the demand for home currency in the foreign exchange market increase, thus raising the rate of home currency in terms of foreign currencies.
3.4 Defects of Exchange Control
In spite of the fact that a large number of nations, especially the less developed countries, have resorted to the exchange control system, International Monetary Fund (IMF) strongly opposes the adoption of exchange control by the member countries because of its serious defects.
Important defects are as follows:
i. The system of exchange control is not based on the sound comparative cost principle of international trade according to which every country tends to specialize in the production and export of that commodity of which it enjoys comparative natural advantage. Thus, the advantages of international specialization are sacrificed under the system of exchange control. Economic resources are not optimally utilized.
ii. Exchange control leads to the reduction in the volume of international trade and contraction of world¶s welfare.
iii. Exchange control encourages bilateral trade and deprives the country from the gains of multilateral trade.
iv. Exchange control is an arbitrary system. It encourages retaliation and restrictive tendencies.
v. Exchange control interferes in the competitive working of the economy and distorts its economic structure by diverting the resources in less economical and less efficient areas of production which do not represent maximum natural advantage.
vi. Exchange control has undesirable effects on the internal economy of the country. Restrictions on imports may lead to inflationary rise in prices due to scarcity of restricted goods.
vii. Exchange control provides only a temporary remedy to the problem of disequilibrium in the balance of payments. Instead of basically solving the problem, it prevents the situation from becoming worse.
viii.Exchange controls involve; large administrative costs to enforce the exchange controls; resource waste in the process of trying to evade the controls or of applying for foreign exchange licenses; and psychological costs of the inevitable perceived injustices created by the controls or their evasion.
ix. Exchange control system is also morally undesirable because it breeds corruption in the country. Need traders use all types of illegal
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methods to obtain the desired amount of foreign exchange which has been rationed by the government?
x. Exchange control system involves great social costs and does not lead to the maximization of community¶s welfare.
SELF ASSESSMENT EXERCISES i. What is foreign Exchange Control?
ii. Enumerate the objectives behind foreign Exchange Control
4.0 CONCLUSION
This student has learned the meaning and concept of foreign exchange control which represents the interference government monetary agencies with the market forces that freely determine foreign exchange rate. We have also learn that though the foreign exchange control mechanism are put in place to influence international trade, business and investments as well as payment mechanism, it also has some negative consequences.
5.0 SUMMARY
Foreign exchange control is a measure which replaces part of the equilibrating function of foreign exchange market by regulating alien to the pricing process. The need to correct balance of payment, check flight of capital, stability of exchange rate and protection of local industries are some of the reasons advance for exchange control. While in terms of the methods usually deployed in achieving the working objectives of foreign exchange control, direct and indirect approach are used. The direct methods include exchange pegging, rationing of foreign exchange, blocked accounts and multiple exchange rates amongst others. The indirect approach on the other hand, involves change in interest rates, import restrictions and export subsidies.
6.0 TUTOR MARKED ASSIGNMENT
State the various methods normally adopted in controlling Foreign Exchange.
ANSWER TO SELF ASSESSMENT EXERCISE
i. Foreign exchange can be defined as that measure which replaces part of the equilibrating function of foreign exchange market by regulating alien to the pricing process. Foreign exchange control mechanisms are put in place to influence international trade, and investments as well as payment mechanism.
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ii. Some objectives advanced for foreign exchange rate control include the need to; correct balance of payment, check flight of capital, stability of exchange rate and protection of local industries. Others include; overvaluation, undervaluation, check undesirable import and practice discrimination in trade.
7.0 REFERENCES/ FURTHER READINGS
Paul, R.R. (1996); Money, Banking and International Trade, New Delhi:
Kalyani Publishers.
Deak, N.L. and Celusak J.C (1984); International Banking, New York:
Prentice-Hall, Inc.
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INTERNATIONAL BANKING