Name: Zhenzhen Xia Student ID: 200917100071 Major: International trade and economics
1. Is the Chinese trade surplus good or bad? And why?
The Chinese trade surplus cannot be judged to be absolute good or bad, because there are both good and bad aspects for China. Good views: When there is a surplus, it means the export volume is larger than import volume, a, the amount of domestic companies may increase, or they will increase their productions, then they need more workers, which will create more job opportunities; b, it also means the income is more than expenditure, so it will increase the national income, then the gross domestic product(GDP) will increase; c, increasing of export results in the increasing demand of RMB, then RMB will appreciate, so it becomes the hard currency; d, it makes domestic companies increase their products, and the number of companies who produce similar commodities will increase, which forms the scale economy. Bad views: a, A large export volume will cause the domestic resources outflow, because lots of domestic lines are labor intensive and resource intensive, so when export increases, the resources outflow will increase; b, it will make China to be a common target of attack, because when there is a trade surplus in China, other countries may have a corresponding deficit, so they will reprimand China, or take some measures to restrict the Chinese exporting, like anti-dumping tax; c, when domestic companies increase their production, the pollution will increase, and national welfare will decrease, because the good quality goods are exported, and the poor quality goods are stayed to satisfy the national need; d, the increasing domestic companies will increase the competition in domestic market, and they may lose their goal because they put all their attentions on exporting.
2. What are the factors that determine exchange rate?
a. Economic Growth. When there is a booming, the domestic business demand will increase, and the investment will increase, so there is more money demanded, and the foreign capitals will inflow, so the RMB demand will increase, then the RMB will appreciate. b. Inflation and Interest Rate. If the inflation rate increases in Chinese market, it means the RMB supply will increase, then the domestic price of goods will increase, then the import will increase, and the demand of foreign currencies will increase, so RMB will depreciate. And when the interest rate increases, the internal capital will decrease, then the foreign capital will inflow, and the RMB demand will increase, so the RMB will appreciate. c. Market Psychology: When there is a high expectation for RMB, investors will buy RMB with other currencies, then the demand of RMB will increase, so the RMB will appreciate. d. Government Action. When the government wants to cover the deficit, it will issue bonds for foreigners, then the RMB demand will increase, and RMB will appreciate. And when the government increases the purchases of foreign goods, the demand of foreign currencies will increase, and then RMB will depreciate compared with
foreign currencies. e. National Income. When Chinese national income increases, the import will increase, and the foreign currency demand will increase, then the foreign currency will appreciate, correspondingly, RMB will depreciate. f. Balance of Payment. When there is a trade surplus in China, it means the export volume is larger than import volume, then the foreign capital will inflow, and the RMB demand will increase, and RMB will appreciate,
3. What is the effect of the fluctuation of exchange rate on companies engaged in cross-border operation?
When the RMB appreciates, a, for domestic exporters, the manufacture cost will increase, and the sales amount will decrease, then the income will decrease, it will reduce the export volume; b, for domestic importers, the cost to purchase foreign goods will decrease, and the sales amount will increase, so the income will increase, and then the import volume will increase; c, for domestic investors, the cost of direct and indirect investments to foreign country will decrease, then such investments may increase; d, for foreign investors, the cost of direct and indirect investment to China will increase, then the foreign investments may decrease for China. When the RMB depreciates, a, for domestic exporters, the manufacture cost will decrease, and the sales amount will increase, then the income will increase, which will encourage the export for China; b, for domestic importers, the cost to purchase foreign goods will increase, and the sales volume will decrease, then the income will decrease, this may cause the import volume decrease; c, for domestic investors, the cost of direct and indirect investments to foreign country will increase, then such investments may decrease; d, for foreign investors, the cost of direct and indirect investments to China will decrease, so it is good for China to appeal to foreign investments.
