Topic 9: How to control exchange rate in order to improve Vietnam’s competitiveness and trade balance.
I. Theoretical framework
1. Exchange rate is the international prices which help coordinate the decisions of consumers and producers as they interact in world markets. There are a wide variety of factors which influence the exchange rate, such as interest rates, inflation, and the state of politics and the economy in each country. There are 2 kinds of exchange rate: nominal exchange rate and real exchange rate.
* Nominal exchange rate is the rate at which a person can trade the currency of one country for the currency of another. For example, if you go to a bank, ...view middle of the document...
Another example is that, supposing you buy a pair of shoes from Converse, which costs 1.000.000 VND. That transaction reduces net exports by 1.000.000 VND because the shoes are imported.
Net exports tell us whether a country is, in total, a seller or a buyer in the world market. If net exports are positive, exports are greater than imports, indicating that the country sells more goods and services abroad than it buys from other countries. In this case, the country is said to run a trade surplus. In the contrary case, the country is said to run a trade deficit. If the net exports are zero, its exports and imports are exactly equal, and the country is said to have balanced trade.
3. Competitiveness of a nation is the ability to offer products and services that meet the quality standards of the local and world markets at prices that are competitive and provide adequate returns on the resources employed or consumed in producing them. In the recent years, countries in the North of Europe such as Switzerland, Finland, Sweden or Denmark have a tendency to be the most competitive economies in the world because of high scores for the quality of their institutions, efficient markets and high levels of technological innovation.
4. The impact of exchange rate on competitiveness and trade balance
Although there are many factors that might influence a country’s trade balance such as consumer tastes of goods and services, prices, income, exchange rate is a main macroeconomic tool to regulate the trade balance with the control of State Bank. Moreover, the real exchange rate tells us which goods, domestic or foreign are more competitive in terms of price. The reason is that real exchange rate is a key determinant of a country’s net exports of goods and services.
When Vietnam’s exchange rate falls, Vietnam’s goods have become cheaper relative to foreign goods; therefore, the competitiveness of domestic goods and services on the world market will increase. This change encourages consumers both at home and abroad to buy more Vietnam’s goods and fewer goods from other countries. As a result, Vietnam’s exports rise and imports fall; both of these changes raise Vietnam’s net exports. In contrast, the appreciation of exchange rate will decrease net export.
II. Real situations
Figure1. Trade balance of Vietnam from 2008 to 2012
Figure2. VND/USD from 2008 to 2012
Figure 1 shows the trade balance of Vietnam from 2008 to 2012. Green and purple columns show the export and import figures during the period. Blue line indicates trade balance, in other words, it shows the difference between export and import over time. Figure 2 represents Vietnam’s exchange rate from 2008 to 2012, a period with many fluctuations. We will take into account both the exchange rate and trade balance of Vietnam simultaneously to see their relationship.
In 2008, the amount of import was at its highest during this period but export’s one was only a half of the former (5.39 billion...