Foreign exchange controls

are various forms of controls imposed by a government

on the purchase/sale of foreign currencies by residents
or on the purchase/sale of local currency by
nonresidents.
Refers to control of international monetary and
economic transaction involving foreign exchange either
by the government directly or a centralized agency like
central bank.
Common foreign exchange controls include:
Banning the use of foreign currency within the country
Banning locals from possessing foreign currency
Restricting currency exchange to government-approved
exchangers
Fixed exchange rates
Restrictions on the amount of currency that may be imported or
exported
The purchase/sale of foreign currencies by residents
The purchase/sale of foreign currencies by non - residents
Merit of exchange control
It maintain exchange stability
Aimed to keep exchange rate in the economy different from the
market exchange rate.
Intends to iron out temporary ups and downs in exchange rate
and this is achieved through exchange equalization control
Correct persistently adverse balance payment
Help in conserving the country depleting gold and foreign
exchange reserve
Country also regulate capital movements in order to prevent the
flight of capital from the country
 Facilitates the objective of economic growth of a country with
stability
Encourage trade with a particular country or group of countries is
termed bilateralism
Protect a country from tough overseas competition
Help proper execution of the economic plans and developmental
planning in a country
Removes the imbalance in the international trade by restricting
foreign exchange to importers for imports
 Government may prohibit the import of certain commodities
altogether with the help of exchange control
Used to earn profit by keeping a wide margin between buying
and selling rates of foreign exchange
A country can adjust the domestic demand & export & import.
By this adjustment internal price stability is maintained
A country tries to escape from abuses of international economic
crisis
Facilitates in making orderly and timely international debt and
other payments
 Maintain the foxed and stable relations with important
currencies to which they have more transaction
De Merits of exchange control
All controls, give birth to he dichotomy in the economy and
encourage political and administrative corruption in the country
Country puts an end to the working of a principle of comparative
cost.
A country has t employ the army competent officials for
implementation which is not feasible for underdeveloped countries.
Generates the feeling of fulfilling national interests at all costs and
this ultimately creates tension among international community
Due to exchange control, there are more fluctuations in the
international economy which encourage the working of business
cycle.
 Against consumer interest
Obstruct economic cooperation internationally
Discourage multi national trade
In the long run, exchange control result in the which is more
harmful for the economy
The criteria laid down for various types of control are
arbitrary in nature.
 Puts several restrictive measures in the way of free
trade. It will reduce the volume of international trade
Presents several hurdles and obstacle in stablishing
specialization in production of several commodities
because of imposition of restrictions on free trade.
Not conducive for free flow of capital movement and
investment an that is not the interest of the economy.
Trade Restriction
What is a trade barrier? What is a physical
trade barrier?
A trade barrier is an obstacle to (or something that stops)
trade
A physical trade barrier is a natural barrier like
mountains, rainforests, deserts
Why would countries use trade barriers? List 2 reasons!
Riddle
What is so fragile, even saying its name can break it?
Tariffs
A tariff is a tax on imported products or services.
In the case of tariffs imposed by the Philippines, the
business that imports or produces the foreign product
must pay the tax to the Philippine government.
The tariff revenue goes directly to the Custom Draw a
Pesso sign next to tariff so you remember, Tariff = taxes
= money
Example
Tariff of two companies sell athletic shoes in the US.
Company 1 is located in Brazil. Company 2 is in Hershey,
Pennsylvania.
A tariff must be paid on all shoes made outside the US
and sold in the US. The tariff is 10% of all sales.
Both companies sell shoes at a price of $100 per pair 1.
Quota
A quota is a limit on the amount of goods that can be
imported.
Putting a quota on a good creates a shortage (or a
scarcity), which causes the price of the good to rise and
allows domestic (inside the country) producers to raise
their prices and to expand their production. Draw a
slow down sign so you remember Quota is a way to
limit or slow down trade
Example
Quota Germany has imported 2 million tons of steel
from France every year for the past decade.
Germany then started an import quota on steel.
Germany now only imports around 1 million tons of
steel from France, but the country of Germany still uses
around 3 tons of steel a year
Embargo
An embargo stops exports or imports (sending goods to another
country and getting goods from another country) of a product or
group of products.
Sometimes all trade with a country is stopped, usually for
political reasons.
Draw a stop sign so you remember that an embargo means
countries stop trading with others
Example
Embargo Last year Spain had some political
disagreements with Greece, so they enacted an
embargo against Greece.
With the embargo, no Greek ships are allowed in
Spanish ports. 1