Importance Of Exchange Rate

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2.2 Exchange rate Exchange rate refer to the prices of the products and services of each country. It has its own currency that are quoted such as the currency of United States call dollar, the currency of Malaysia call Malaysian Ringgit, and the currency of Singapore call Singapore dollar (Wong 2000). Exchange rate play an important role in comparing the value of products and services in different countries throughout the world. Exchange rate is the price value of one currency that able to convert to another currency. For example, if the Singapore exchange rate for Malaysian exchange rate is 2.7, this means that 1 Singapore can be exchanged for RM 2.70. The factors that will influence the exchange rate includes the inflation rate, interest…show more content…
Goods refer to the raw materials and finished products and services refer to the service of transportation, tourism, consultant fees and others. A trade surplus will available if the export exceed the import of goods and service. In contrary, a trade deficit will available if the import exceed the export of goods and service of that country. Besides, current account also records the income received from assets or flowing out of the country. It can be the form of the salaries, stocks or dividends such as the salaries paid by US company to a Malaysian accountant who is working in US temporarily. Unilateral transfers also is the part of the current account. It is transfer of the assets in the form of foreign aids between countries or received gifts that send from abroad or send pension payments to the residents that living at foreign country (William…show more content…
Financial account can divide to official reserve assets, statistical discrepancy and other assets. Official reserve assets transactions is usually undertakes by central bank by hold gold, special drawing rights (SDE), foreign currencies and securities in its own country or abroad. Central bank selling Malaysian Ringgit and purchase foreign currency is similar to importing an asset and resulting deficit to the account( Resbank 2000). Other assets such as direct investment, purchase of share or bonds, or provides loans. When domestic residents take loan from foreign, it add credit to the financial account since the capital inflow. Another example is when a foreigner purchases shares from Bursa Malaysia, the money is inflow and add credit to financial account. On the other hand, the money is flow out if purchase foreigner share, and leading to deficit to financial account. Since it is commonly that the balance of payment account is deficit or surplus as the data and amount from the transaction might origin from different sources. Statistical discrepancy is the account that will debit from or credit to the financial account in order to make the account of capital and current account to be balanced with financial account (Krugman et al.
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