Exchange Control

Topics: Currency, Investment, Exchange rate Pages: 2 (389 words) Published: December 13, 2012
Question 2
Exchange Control refers to governmental regulation of the conversion of currencies, the purchase of foreign coin or gold, and the transfer of funds between countries . Common exchange controls include banning the use of foreign currency and restricting the amount of domestic currency that can be exchanged within the country. Exchange Controls impacts on the economy include the following; The downward trend of rate of exchange against major trading currencies; this control lead to reverse and interest rates to fall from current levels, fore istance once vehicle purchases made prior to the raising of taxes are completely realized. It is important to clarify in this regard that increase in taxes are not mainly aimed at raising government revenue but instead is intended to curb excessive demand for vehicle imports which may not be entirely moderated by the market determination of exchange rate, demonstrating the high degree of price inelasticity of demand accompanying in the national vehicle imports. Highly increase in trade costs: exchange controls raise the cost of trading in mainly in differentiated products compared to the cost of trading in homogeneous products and this is because differentiated products have a greater variance in their unit values over different varieties, it tends to be more taff for traders to convince bureaucrats that a particular transaction is not mis-invoiced to avoid the exchange controls.

Impact on investment decision; the control does not impact on all potential capital flows in neutral fashion with result some productive activities are favored relative to others. Economic agent whose activities generate foreign exchange are in position to acquire foreign assets earning higher effective yield than alternative domestic investment The Damage in a governance challenged economy: The same exchange controls may do a damage in a governance-challenged economy, this depends on whether the corruption primarily weakens...
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