Exchange Rate Performance and Competitiveness Study

Question: Discuss about theExchange Rate Performance and Competitiveness Study. Answer: Exchange Rate and Competitiveness of Finland Fluctuation in the exchange rate with respect to the current of other economies determines competitiveness in the international market. Depreciation or appreciation of the currency with respect to a foreign currency determine the level of international trade and trade balance of a country. Depreciation of home currency encourages export by making domestic product cheaper to the world market. Cheaper products makes export sector competitive with respect to the other economies (Auboin and Ruta 2013). On the other hand, depreciation makes import costly and reduces demand for foreign products, which helps to improve trade balance. In contrary, appreciation of domestic currency makes import goods cheaper by raising value of the currency. Export becomes costlier and hence, demands for domestic product in foreign market falls. Euro is the official currency of Finland. Finland uses the common currency of European Union to get the trade facilities of the common market of EU. Therefore, the exchange rate of Euro with respect to the other currencies has been displayed below: Period USD JPY GBP SEK AUD BRL MXN 2016 1.1069 120.2 0.81948 9.4689 1.4883 3.8561 20.6655 2015 1.1095 134.31 0.72584 9.3535 1.4777 3.7026 17.6161 2014 1.3285 140.31 0.80612 9.0985 1.4719 3.1211 17.655 2013 1.3281 129.66 0.84926 8.6515 1.3777 2.8687 16.9641 2012 1.2848 102.49 0.81087 8.7041 1.2407 2.5084 16.9029 Table 1: Exchange rate of Euro (Source: suomenpankki.fi 2017) Figure 1: Exchange rate fluctuation (Source: suomenpankki.fi 2017) The above figure presents the exchange rate of Finland against US dollar, UK pound, Australian dollar and Brazilian Real. The exchange rate against US dollar has fallen since 2014 indication depreciation of Euro and decrease in purchasing power of the currency compared to other currency. Therefore, export of goods and services from Finland has increased during 2014 and 2015, whereas import has decreased during two years. Falling exchange rate indicates that value of Euro has fallen. Value of pound with respect to Euro has fallen indication appreciation of domestic currency with respect to pound. It indicates that possibility of import from UK has increased in Finland. Increase in import compared to export increases trade deficit and reduces competitive position of the country. Figure 2: Exchange rate with Japan and Mexico (Source: suomenpankki.fi 2017) Figure 2 is showing changing trade relations with Japan. As Euro has been appreciated to buy greater number of Japanese yen with 1 Euro, import has been cheaper, while export has been costly. However, after 2014, trade relations have changed with the depreciation of Euro. Exchange rate with Mexico has been relatively steady. Along with exchange rate, the determining factor of the global competitiveness is innovation and investment in R D. Finland spent 3.5% of the GDP in RD during 2013, which was highest among OECD countries (oecd.org 2014). Finland holds 8th position in the global competitiveness index of 2016-17 (weforum.org 2017). Investment in RD has improved product quality, product category to enhance product market efficiency and competitiveness of Finland. References Auboin, M. and Ruta, M., 2013. The relationship between exchange rates and international trade: a literature review.World Trade Review,12(03), pp.577-605. oecd.org 2014. OECD Economic Surveys FINLAND Available at: https://www.oecd.org/eco/surveys/Overview_Finland_2014.pdf [accessed on 04.18.2017] suomenpankki.fi. 2017. Exchange rates, yearly average. Available at: https://www.suomenpankki.fi/en/Statistics/exchange-rates/tables/valuuttakurssit_taulukot_en/valuuttakurssit_short_en/ [accessed on 04.18.2017] www3.weforum.org. 2017. The Global Competitiveness Report 20162017. Available at: https://www3.weforum.org/docs/GCR2016-2017/05FullReport/TheGlobalCompetitivenessReport2016-2017_FINAL.pdf [accessed on 04.18.2017]