The Effect of Interest Rate on International Trade
The macro economy significantly relies on the rates of interest for its performance to be
established. These rates affect almost every aspect of the macroeconomy, including employment,
economic growth, GDP, prices, and balance of payments (Wuhan and Khurshid 81). As such, the
rate of interest is a critical element in economics, and its changes can be far-reaching
implications on both domestic and global economies. The macroscopic economic situation can
be judged by examining the stability of rates, and if they are not stable, the reasons for the
fluctuations should be established. There is a close relationship between the rate of interest and
value of the currency, and this also implies that investment and savings are in the mix.
International trade is hinged on the smaller economic interactions between nations, and the value
of currencies of the transaction entities is an essential factor. With the unprecedentedly high level
of interconnectedness on the global scale, governments may take advantage of the effect that
their domestic interest rates has on the patterns of international trade to enhance the benefits that
their nations are getting from the businesses. This paper will explore the effect of interest rates
on international trade.
The Effect of Inflation
The relationship between interest rates and currency becomes more sophisticated when
other factors such as inflation enter the discussion. The reason for this complexity is that
whenever interest rates go up, there is a very high likelihood that the inflation rate will also be
high. Very few countries have been able to separate these two from going up together. Moreover,
another factor that undermines the smooth relationship between rates and currency value is
political stability. When a country has a relatively good political environment, there is a high
likelihood that foreign investment will stream in regardless of interest rate levels, and thus this
implies that the relationship between interest rates and international trade be co...