Trang 1 1 SCHOOL OF ECONOMICS AND INTERNATIONAL BUSINESS ---***--- RESEARCH PAPER The effect of exchange rate movements on Vietnam’s trade balance in the period 2000 – 2018 No.. Bui121In
FOREIGN TRADE UNIVERSITY SCHOOL OF ECONOMICS AND INTERNATIONAL BUSINESS -*** - RESEARCH PAPER The effect of exchange rate movements on Vietnam’s trade balance in the period 2000 – 2018 Topic : Foreign exchange trading Class : TAN432(GD1-HK2-2223).1 Instructor : M.A Phan Kim Thoa Group : Group 15 No Name Student ID Bùi Quang Huy 1915513020 Đỗ Hoài Linh 2014410078 Phan Thị Quỳnh Mai 2011410056 Vũ Thị Huệ 2011410035 Vũ Mạnh Hùng 2014410061 Ha Noi, March 2023 WORK ASSIGNMENTS No Name Student ID Assigned Section I: Bùi Quang Huy 1915513020 Đỗ Hoài Linh 2014410078 Section 2: Analysis (Result of the analysis) 2011410056 Section 2: Analysis (2.1 + Discussion) Phan Thị Quỳnh Mai framework (1.3, 1.4, 1.5) Abstract, Vũ Thị Huệ 2011410035 Evolution Theoretical Introduction Format Research Paper, Section I: Theoretical framework (1.1+ 1.2) Section 3: Vũ Mạnh Hùng 2014410061 Recommendations + References The effect of exchange rate movements on Vietnam’s trade balance Linh H Do1 , Mai Q T Phan1 , Hue T Vu1 , Hung M Vu1 , Huy Q Bui2 1International Economics, Foreign Trade University 2International Business, Foreign Trade University TAN432: English for Specific Purposes M.A Phan Kim Thoa February 24, 2023 ABSTRACT: This study clarifies the impact of the fluctuation of the VND/ USD exchange rate on trade balance in Vietnam by using the Stata tool Variables used in this research included exchange rate and trade balance Trade balance was drawn from import and export value from the statistics of Vietnam Customs The time range for conducting data research was from 2000 to 2018, specifically data used are monthly statistics The nominal effective exchange rate data is taken from Vietnam customs from the first day of June 2000 to the first day of June 2018 for each The result of findings showed that the exchange rate appreciation had a negative effect on the trade balance In details, revaluation in exchange rate had trend to make trade deficit; and devaluation in exchange rate had trend to make trade surplus Key words: Exchange rate, trade balance, Vietnam, Stata, effect INTRODUCTION: Since the early 20th century, the term ‘globalization’ has been appeared, developed its current meaning sometime in the second half of the 20th century, and came into popular use in the 1990s The development of ‘globalization’ has continuously affected almost every countries in modern economy Thereby in the context of globalization and international economic integration, mechanisms and policies to regulate exchange rates are very important to directly affect the trade balance and macroeconomic stability in each country As a result, imbalance in the trade balance has become a favoured research topic within the community of economists Passing many years of economic construction, Vietnam has had to face with the situation of trade deficit for a long time due to many different reasons (CEIC, 2019); and exchange rate is one of the important reasons influencing the change of trade balance The management of exchange rate and balance trade is extremely important in Vietnam which directly impacts trade balance Therefore, it is necessary to examine the impacts of exchange rate on the trade balance in order to give recommendations for better managing exchange rate and trade balance in Vietnam In this report, we used qualitative methods to analyze the topic "The effect of exchange rate movements on Vietnam’s trade balance in the period 2000 - 2018" The research paper is organized as follows: SECTION 1: THEORETICAL FRAMEWORK SECTION 2: ANALYSIS AND FINDINGS SECTION 3: SOLUTIONS AND RECOMMENDATIONS During the process of making this research paper, due to the limited amount of time as well as some certain limits in understanding and data collecting, despite all the efforts, the report may hardly avoid mistakes We are always willing to receive your comments so that our group can improve and complete this paper SECTION 1: THEORETICAL FRAMEWORK 1.1 Concepts of exchange rate 1.1.1 Definition of exchange rate Gary (2014) concreates exchange rate as ratio of which one of these currencies can be exchanged for any other at any given point in time Lu (2011) also states the similar definition that exchange rate is the price of some foreign currencies in terms of home currency In particular, one foreign currency can buy how much of home currency In the macroeconomic context, the exchange rate is influenced by many factors, such as production capacity or technological developments All of these factors are subject to change based on the actual situation of each country Therefore, the exchange rate also suffers the same effects Thus, the ratio of the exchange rate is only temporary, could changes daily The ratio of today is different that of yesterday It can increase or decrease day by day Sometimes, the ratio is remained without movement Generally speaking, exchange rate is the price of one currency in terms of another currency The volatility of exchange rate is the increase or decrease of the price of the currency The price can be either fixed or floating Central bank has the role in deciding fixed exchange rates and floating exchange rates which are made decision based on the demand and supply of the market Every country has the exchange rate of changing its domestic currency into other currencies 1.1.2 Effect of exchange rate movements on import and export Effect of devaluation of currency on imports and exports Devaluation means there is a fall in value of a currency The devaluation of a currency has some effect on import and export of a country It will make imports more expensive and exports cheaper A country with its depreciated currency will have exports more competitive and appear cheaper to foreign customers Consequently, the demand for exports will increase As in the case of Vietnam, when VND is depreciated compared to USD, Vietnam goods appear cheaper and become more attractive to overseas customers Therefore, demand for exports will go up As a result, there is an increase in Vietnamese exports Generally, devaluation makes Document continues below Discover more from: trị dự án quản QTR407 Trường Đại học… 156 documents Go to course Nhóm 11 DỰ ÁN 43 CHUỖI HỆ THỐNG… quản trị dự án 100% (2) ZARA Supply Chain Management quản trị dự án 100% (1) Bai tap chuong lua 10 chon du an quản trị dự án 100% (1) Kế hoạch dự án thiện 48 nguyện nhóm sinh… quản trị dự án 100% (1) 100 tập đầu tư Lập dự án đầu tư quản trị dự án 100% (1) Bai tap tinh VACC commodity price of a country cheaper to foreign customers; accordingly, export SLIDE MR.TAM volume increases to match with the increasing demand 34of foreign customers quản trị dự án 100% (1) Devaluation makes exports price cheaper and exports volume higher; but makes imports price more expensive and imports volume lower In details, imports commodity such as petrol, food, and raw materials will be more expensive Simply understanding, when the currency of a country is depreciated, people of the country have to spend more money to buy products in overseas markets As a result, the demand for imports accordingly reduces There is a fact that devaluation of a country’s currency will create trade surplus for the country The reason is that trade surplus equals exports minus imports When exports increase and imports decrease, trade surplus occurs as the consequence of this phenomenon In other words, devaluation is necessary to reduce the size of trade deficit Devaluation could cause higher economic growth Part of AD is (X-M) therefore higher exports and lower imports should increase AD (assuming demand is relatively elastic) In normal circumstances, higher AD is likely to cause higher real GDP and inflation So, devaluation causes higher inflation The reason is that expensive imports lead to high costs; and high costs cause the result of the increase in the prices of domestic goods and services In conclusion, devaluation is interested by exporters because they can increase the quantity of exports The profit is high although the price of commodity is low Trade deficit has opportunity to improve because exports are high imports in terms of the quantity High quantity will create high revenue In other sentences, devaluation makes trade surplus As a result, economic growth might increase On the other hand, devaluation makes the price of imports increase Thus, costs are high which promote the increase in inflation Expensive imports will lead to high price in domestic products which is the result of high inflation Effect of revaluation of currency on imports and exports Being different from devaluation, revaluation means the increase in the value of a country’s currency in relation to a foreign currency Revaluation will make exports more expensive and imports cheaper In other sentences, the price of exports commodity will be more expensive to foreigners This leads to the reduction in exports demand Consequently, there is reduction in the quantity of exports Imports become more attractive to domestic customers because the price of imports is cheaper So, demand for imports rises In the consequence, the quantity of imports also increases In the consideration of trade balance, account surplus can reduce due to the increase of imports and decrease of exports A country wants to appreciate the value of currency at aim to delete trade surplus and reduce the situation of accumulating too many foreign reserves Revaluation stimulates import demand and curbs export demand (Quynh Anh, 2018) The success of revaluation depends much on the response of import and export goods Apart from the effect on trade balance, revaluation impacts inflation either high or low If the exporting country’s currency revaluates, demand for its goods will decrease, thereby leading to high inflation Conversely, if the importing country’s currency revaluates against the exporting country’s currency, low inflation may occur because of availability of cheap imports 1.1.3 VND/USD period 2000-2018 The following line chart presents the history data of VND/USD from year Jan, 2000 to Jan, 2018 The data is chosen on 1st January of each year Source: Vietnam customs (2019) Based on the table above, it can be seen that VND/USD has changed so much In months of year 2000, investors can use one dollar to buy average 14 thousand VND Passing nearly 20 years, one dollar can buy average over 23 thousand VND As a result, USD is appreciated and VND is depreciated in general There are some reasons making USD increase (Phan Minh Ngoc, 2018) Firstly, Vietnam has high foreign currency reserves It is to reserve USD in Vietnam Dollar currency reserves has reflected the difference between demand and supply of USD which is the factor deciding the change of VND/ USD In fact, high demand of USD in Vietnam is the cause of abundant USD resource In the case that if USD supply is higher than USD demand, the exchange rate has trend to decrease (VND is appreciated compared to USD) This is not good for export; so State bank has to buy USD in order to reduce the press on the increase of VND This contributes to the increase in foreign currency reserves Secondly, USD is appreciated when the reduction in USD resource from foreign investors happens It means foreign investors decrease the investment of USD in financial operations such as stock, or financial market This is the result of weakening VND and strengthening USD 1.2.1 Definition of Trade balance Trade balance is sometimes called balance of trade According to Romero (2012), trade balance means the difference between import and export of a particular country