MONEY and BNKING

Trade deficit among other effects makes a country spend or export a lot of its currency to the foreign market, which may create shortage of the currency in the local market. Cause of trade deficit may attribute to the practices of by foreign markets or countries lowering the cost of their export to the affected country and increasing cost of importing goods and services from the affected country. This means that the affected country will have to spend a lot of its currency to export goods and services, and spend very little to import goods from the competitor country. From the analysis, it means that trade deficit literally increases supply of a country’s currency in the foreign market making the currency depreciate. This means that it impossible and practical difficult to maintain the value of local currency with negative balance of trade. For example, if supply of US dollar in the Euro market increases, the number of Euro required in buying one dollar will decrease. When the number of Euro required in buying one unit of dollar decreases, the demand for dollar in the foreign Euro markets will increase due to the low prices of dollar. This means that many foreigners in the European countries will be holding large quantities of dollars, as they will not be in demand for the American goods. This effect will result to decrease in the supply of dollar in American economy and subsequent rise in demand for dollar in the same American economy. The general effect of such market trend on the American economy will sharp deflation as locals will be not be willing to spend the little dollars they have in their custody. Economic recession occurs due to scarce supply of local currency in the local market, which affects demand among the local consumers. To correct the shortage, a country can resort to borrowing from foreign countries to spur its production and manufacturing activities. A country can also review its market and monetary policies to attract foreign investors who be returning local currency lost to the foreign markets. The best way that countries exercise control over their value of their respective currencies in the international market is through intervening the foreign exchange market. Foreign exchange market specifically deals with daily and periodical valuation of all international currencies depending on the international flow of the specific country’s currency. Intervening in such a market may mean that an interested country buy its own currency from the international exchange and create shortage of the same in the international market. A country can also intervene by selling its currency in the international market with aim of acquiring another currency with high value. In so doing, the buying country shields it domestic economy from any economic shifts in the foreign market country. This kind of economic practice is common among the developing countries but rare in the stable and industrialized countries. Industrialized countries do not like intervening in the foreign exchange market or various reasons. One of the reasons why industrialized countries do not intervene in the foreign exchange market relates to their developed statuses that makes them perform many manufacturing and production activities that earns them foreign income when exported. This means that they are always in situation of competition for the international market where they export their goods and services. Attempts by anyone of