Equilibrium

hello everyone

ok today i am going to talk abt equilibrium exchange rate. even my tennis coach weber teaches his tennis using a equilibrium theory. hot/cold, high/low, ying/yang, flat/spin, etc. So what excatly is equilibrium all about?

Equilibrium does not only apply to econoimics and finance, equilibrium is all around us in our everyday lifes. If you bath and you feel that the water is cold, what you do? you add hot water to balance the tempreture until you feel comfortable. if you feel you overspent, then wat you do? you spend less and save more. if you execerise intensively, you will rest. if you eat a lot during lunch, you will eat less during dinner. so in a way, there is always a balance in everything we do.

SO now what is a equilibrium exchange rate?

The exchange rate between two currencies is like a price like any other. Its movement enables the two economies to archive trade and payment balance. If one country's exchange rate is overvalued (if a unit of its currency is worth too many units of the other currency), its export become more expensive in the foreign currency, while imports become cheaper in its own currency. Therefore export volumes tend to decline and imports volumes to increase, eventually the trade balance moves into deficit and unemployment rises. Conversely, when a country lowers its exchange rates, exports become cheaper and increase,while imports are decline. The trade balance improves but real income is lowered due to higher internal prices.

The correct "equilibrium rate" for the exchange rate at any one time is that which enables an economy to combine full employment of productive resources simultaneously with balance of payments equilibrium. A higher exchange rate generates overseas deficits and uncmployment, a lower exchange rate build up excessive foreign currency reserves and domestic inflation.

The correct "equilibrium rate" varies in value over time. The variety of factors (trade balance,productivity, etc) ensure that the "equilibrium rate" changes with the years. There are a number of theories and methods to calculate the "equilibrium rate", which i wont discuse about it now. becoz i dun realli think it is important and it wont help us to make money, then y bother abt it rite? The monetory authorites wont tell us how they calculate anyway. aiya dun really need to know this in details, all we need to know such a equilibrium rate exist. hehe