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Exchange rate convertibility is the ability to exchange currency of one member state to another currency freely; convertibility is a very important factor when it comes to international trade since investments are made in different currencies, hence, the need to be exchanged. In this scenario we are going to examine the exchange rate convertibility of the Yen of China Vs. the Forint (HUF) of Hungary.
Impact of exchange rate convertibility on the relative investment attractiveness
For the longest time possible, the Yuan (China) and Forint (HUF) of Hungary has been rigid and this has caused its foreign exchange reserves to be very high, both had implemented a fixed exchange rate regime and controlled its capital flows. However, the 2008/2009 financial crisis saw both China/Hungary economies greatly affected and exchange rate convertibility was the best option yet. The exchange rate convertibility will make China/Hungary currency very active in the international trade and various transactions globally. China is believed to be the second largest economy and exchange rate convertibility has increased its foreign reserves greatly, especially the dollar denominated assets, While Hungary is far behind when compared with China in terms of economic growth
When comparing the two countries China and Hungary in terms of exchange rate convertibility, China emerges superior in terms of exports and foreign exchange reserves because of a huge benefits huge benefit it obtain from exchange rate convertibility, since it will easily enhance exchange between other countries hence enhancing its economy, hence enterprises in China will expand overseas due to thriving economy. On other hand Hungary has improved its economy by establishing new policies governing exchange internal and external exchange rate hence increasing competitiveness internationally. With the entry of the Yuan in the international market, there will be less dependence on the US dollar, thus increasing China’s investment attractiveness (Shen, 2011).
The impact of the real exchange rates on the relative investment attractiveness
Real exchange rate in most cases does not appear in any of the economic growth models and this always raises alarm. The main channel that the real exchange rate uses is the tradable sectors in which it affects the growth size of the sector. There is, however, a negative relationship between the real exchange rate and economy growth in China and Hungary, therefore a real exchange rate appreciation exerts negative effects on the economic growth of China/Hungary by reducing its international competitiveness, especially in the tradable, sector which involves imports and exports, and also destructs its level of employment. Appreciation of real exchange rates, therefore, lowers both two countries investment attractiveness to the rest of the world and this affects China/Hungary negatively in its international trade endeavors.
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What happened to the value of the real exchange rate over time?
The value of the real exchange rate over time does not remain constant but it, however, changes in accordance with some fundamental economic variables such as inflation and other available sources. This remains so as long as the purchasing power parity does not
What is the significance of this change in value?
Due to the changing of real exchange rate overtime, it in turn affects the competitiveness of traded goods, and does not move at any equilibrium level. An increase in the real exchange rate has effects on the countries’ economy as well as their competitiveness in the international trade, (Shen, 2011).
What are implications of the absence or presence of a forward exchange market?
Absence of forward exchange market allows for the transfer of risk and, therefore, whether the countries like it or not, they will always be saddled with risk. The presence of forward exchange market allows for selling of the risk at a given price to different entity that is capable of handling such an exposure to the risk.
Exchange convertibility will help China and Hungary to be more competitive in the international trade as well as improve their economy, hence, will make them have high investment attractiveness in the long run. Real exchange rates and a country’s economy have a negative relationship, and it is believed that an appreciation of the real exchange rate will automatically injure a country’s economy, and this will reduce its competitiveness in the international trade as well as reduce its investment attractiveness.
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