This in the case of a small

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This gain is reflected in an increase in their national incomes, thereby leading to a simultaneous change in their (a) factor endowment, and (b) preferences, including the changes caused by “demonstration effect”, if any. Changes in Productivity: Trade, particularly in the case of a small country, may also lead to an inflow of fresh technology, business practices, and a new attitude towards work and earning. These days, growth economists also take note of what they call Total Factor Productivity (TFP), which is that addition to the productive capacity of the economy which cannot be attributed to any specific productive resource. Financial System: In our discussion, we had totally ignored the impact of the financial system on the productive capacity of an economy. An ‘appropriate’ supply of ‘money and credit’ has always been considered helpful in facilitating economic activities.

However, these days, the concept of ‘money and credit’ has been replaced by a much broader concept of the ‘financial system as a whole’, which includes the entire range of financial instruments, the financial institutions and the financial markets. It is now widely recognised that a modern economic system can increase and maintain its rate of growth only if it is supported by a strong, sensitive and responsive financial system. Therefore, the demand-offer curve of a country can also shift on account of the manner in which its financial system develops and operates.

Official Policies: Another important set of factors influencing demand-offer curve of a country are related to the fiscal and monetary policies of the authorities. Fiscal policy of the government, including its policy relating to customs duties, can affect the cost of economic activities including international transactions. Similarly, the monetary policy of the authorities influences the supply and cost of credit for financing exports and imports. Institutional Framework and Governance: Each country has its own institutional framework. The manner of working and efficiency of governments also differs from country to country. These factors deeply influence the outlook of traders, potential trade, partners, buyers, investors and the public at large, with a corresponding impact on the demand-offer curve. Bargaining Strength: The demand-offer curve of a country is influenced by its bargaining strength in international markets.

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This strength, in turn, is influenced by a number of factors including the comparative size of its economy, and the nature of its imports and exports. Its share in the world-total export/ import of some essential items has a direct impact on its bargaining strength. Similarly, if several countries want to hold the currency of a single economy (like the US dollar) as a foreign exchange reserve, its bargaining strength increases. This happens because of the eagerness of exporters of other countries to be paid in its currency. In contrast, the bargaining strength of a country weakens if it is trying to accumulate balances of a foreign currency. Sometimes, in order to encourage its exports, such a country also follows a policy of depressing the exchange rate of its domestic currency. For example, any fall in the value of US Dollar vis-S-vis INR is normally viewed with concern by both the Government of India as well as Indian exporters.

But some business segments, e.g. the travel and hospitality industries react gleefully to such situations, since foreign travel becomes cheaper, in rupee terms, for Indians going abroad for business or pleasure. Balance of Payments and Capital Flows: Persistent balance of payments difficulties and huge international capital flows can also have a significant short term impact on the demand-offer curve of a country.

Categories: Currency


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