How exchange rates and interest rates affect national competitiveness

¶ … role of exchange rates and interest rates. The essay will focus on how these two principles are related and how they simultaneously affect how one another's essence develops and manifests. This essay will also address how the competitiveness of a nation or country depends on these financial rate functioning in a harmonious balance.

Defining Competitiveness

In the corporate model, profits rely on competition to provide for exchanges of energetic source or also known as money. Money makes the world go around and the quest for its power puts humanity and its organizational power in full swing in attempts to come ahead in the game of life. Competition, like all concepts and ideas are merely tools and models that can guide leaders of corporations and countries leadership to performing honest and truthful acts the reflect a higher standard of living. Competition without sportsmanship provides the breeding ground for the worst of humanity, seen in greed and ruthless devastation of others person and property in varying forms of conflict. Nations and organizations alike should strive for balancing competition with ethical aims and principles.

Exchange Rate and Interest Rates

The exchange rate and interest rate of any given country can have a varying and changing effect depending on certain circumstances that are relevant at the time. Since the exchange rate is a measure of the strength of a currency in relation to another, the subjective value of opinion seems to play a large role in the exchange rates that are offered by traders of currency seeking to find a competitive advantage in manipulating the financial markets to make profits merely on the exchange of money and no true value of products or services changes hands. Commerce is essentially modified to include the mere exchange of money based on future events that relate to the originating source of that nation's currency.

The role of inflation which ultimately dictates the strength of a nation's currency and hence its competitiveness plays a pivotal role in how exchange rates and interest rates correlate with one another. "One simple channel linking interest rates and exchange rates is through the effects of inflation. Since nominal interest rates depend on expected inflation while nominal exchange rates depend on relative rates of foreign and domestic inflation, an inflation shock will affect both nominal interest rates and exchange rates," (Hakkio, 1996).

Mysterious Nature

There are millions upon millions of factors, numbers, contributions and ideas that go into any economic forecast. A nation's ability to be competitive within the global marketplace must be aligned with their strategic goals and outcomes. The goals and objectives that a nation sets out for itself largely dictates how the competition is fared out. The stage is not equal on the global market making it very difficult to suggest that a clear cut and definitive relationship can be established between competition, exchange rates and interest rates. Their confluence suggests that something that transcends economics and finance itself is at work.

Hnatkovska et al. (2008) agreed that this relationship is mysterious in nature and provides only a glimpse at what may be inferred from financial data. They argued that "What is the relationship between interest rates and the exchange rate? The empirical literature in this area has been inconclusive. The relationship between interest rates and the exchange rate is non-monotonic. In particular, the exchange rate response depends on the size of the interest rate increase and on the initial level of the interest rate."