How to Control Exchange Rate in Order to Improve Vietnam’s Competitiveness and Trade Balance.

Midterm Presentation

Topic 9: How to control exchange rate in order to improve Vietnam’s competitiveness and trade balance.

I. Theoretical framework

1. Exchange rate is the international prices which help coordinate the decisions of consumers and producers as they interact in world markets. There are a wide variety of factors which influence the exchange rate, such as interest rates, inflation, and the state of politics and the economy in each country. There are 2 kinds of exchange rate: nominal exchange rate and real exchange rate.

* Nominal exchange rate is the rate at which a person can trade the currency of one country for the currency of another. For example, if you go to a bank, you might see a posted exchange rate of 21,000 VND per dollar. If you give the bank 1 US dollar, it will give you 21,000 VND; and if you give the bank 21,000 VND, it will give you 1 US dollar.

If the exchange rate changes so that a VND buys more foreign currency, that change is called an appreciation of the VND. And the VND is said to depreciate when exchange rates change so that a VND buy less foreign currency.

* Real exchange rate is the rate at which one person can trade the goods and services of one country for the goods and services of another. For example, if you go shopping and find that a pair of trousers of Vietnamese is twice as expensive as a pair of trousers of China, the real exchange rate is ½ pair of trousers of Vietnamese per pair of trousers of China. We have a formula to calculate the real exchange rate:

2. Net exports (NX) or trade balance equals the foreign purchases of domestically produced good (exports) minus the domestic purchases of foreign goods (imports). The net in net exports refers to the fact that imports are subtracted from exports.

A domestic firm’s sale to a buyer in another country, such as Vietnam’s rice exports into China, increases net exports. Another example is that, supposing you buy a pair of shoes from Converse, which costs...