The Relationship Between Exchange Rates and International Trade of the Philippines (2001-2011)

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CONTENTS
INTRODUCTION1
METHODOLOGY2
1. Nominal exchange rate (NER)2
2. Real exchange rate (RER)2
3. Nominal effective exchange rate (NEER)2
4. Real effective exchange rate (REER)3
DATA COLLECTION AND CALCULATION4
ANALYSIS6
1. The divergence between the NER and RER index (2001-2011)6 2. The relationship between NEER, REER and trade competitiveness of the Philippines (2001 – 2011)10 CONCLUSION14
REFERENCE15

INTRODUCTION

The Phillippines is the 46th largest economy in the world, which has been considered one of the Tiger Cub Economies in South-east Asia along with Indonesia, Malaysia and Thailand. As a newly industrialized country, the Phillipines has been switching its direction from agriculture to services and manufacturing.

From 1992 to 2010, the Philippines economy has come up against numerous difficulties and unexpected changes, such as the Asian economic crisis (1998) and the world financial crisis (2008). Those external and internal issues have induced more vulnerability in the country’s economic situation during the period.

In the scope of this paper, our assigned task is to review the exchange rate policy and its impact on the trading competitiveness in the Philippines between 1997 and 2011. To fulfill the project, two main sets of variables, namely Exchange rates and Trade volumes, must be taken into consideration. However, due to the inevitable deficiency and non-concentration of the data available, we would narrow our project’s scope to the period 2001 – 2011 only, with 15 trading partners including the US, Japan, China, Russia, Switzerland, Norway, Turkey, India, South Korea, Brazil, Canada. Singapore, Saudi, Arabia, South Africa and Taiwan.

On fulfilling this project, we aim at providing you with an overview of the Philippines’ foreign exchange market during the given period, as well as the effects of exchange rates movement on its overall trade balance. Furthermore, we would also hope that this paper can work as part of your estimation and forecast about the country’s currency market in the future.

METHODOLOGY

1. Nominal exchange rate (NER)

The exchange rate policy in the Phillipines can be viewed in many ways. In the narrowest aspect, it is related to the nominal exchange rate (NER) between the country and its major trading partners. By definition, nominal exchange rate is merely the price of one currency in terms of another, with no reference to the purchasing power of goods and services. It is usually represented in index form, and in the scope of our project, we choose 2001 as the base year due to insufficient data.

2. Real exchange rate (RER)

At another level, exchange rate policy can be viewed in terms of the behavior of the real exchange rate (RER). This can be presented in two ways, the static form and the relative form. In this project we would apply the latter, which can be calculated as follows: [pic]

in which er : real exchange rate
E : nominal exchange rate index
P* : foreign price level
P : domestic price level
This provides the mechanism through which the further repercussions on output growth, income distribution and other development concerns can be traced.

3. Nominal effective exchange rate (NEER)

More broadly, under the present system of generalized currency floating, the nominal effective exchange rate (NEER) - representing a weighted average of 15 nominal bilateral exchange rates mentioned above - is also of the policy’s interest. [pic]

in whiche NER index
w weight of bilateral nominal exchange rate
j number of bilateral nominal exchange rate (major trading partners) i time
Moreover, changes in NEER also prove to have certain financial effects and implications for macroeconomic stability.

4. Real effective exchange rate (REER)

The real effective exchange rate (REER) is the...
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