Foreign Exchange Rates and Their Effect on International Trade
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This Capstone project is to find out whether foreign exchange rates and CPI rates have an impact on international trade. The purpose is to discover if certain variables are correlated to trade balances. The countries of the United States, France, Germany, Japan, and the United Kingdom will be studied from the years 1973 to 1991. First, a history of exchange rates and trade will be given. Second, issues and trends in international trade will be discussed. Third, changes in trade policies and strategies will be given. Fourth, the methodology used for the regression analysis using the trade balance for each country against the three variables of that country's CPI, the importing country's CPI, and the exchange rate will be discussed. Also, a t test was done to show the significance of the correlation. After an analysis of the regression and the t test was done, the results showed an insignificant relationship in 52 of the 60 regressions between trade balances, exchange rates, and CPI rates between the five trading partners. The eight significant relationships between foreign trade balances and changes in CPI and exchange rates is due to a relationship between the variables. In conclusion, the reasons that trade balances change over time may be due to factors other than inflation or CPI and exchange rates. Thus, this research project did not prove that exchange rates, CPI rates, and trade balances are highly correlated.