THEORETICAL PERSPECTIVE ................................................................................................................................... 4 WHAT IS DIRECT FOREIGN INVESTMENT (DFI)?............................................................................................................... 4 WHY FIRM ENGAGED IN FOREIGN DIRECT INVESTMENT? ....................................................................................................

4 COMPONENTS OF BALANCE OF PAYMENTS: ................................................................................................................... 5 CONCEPTS OF EXCHANGE RATE .................................................................................................................................. 6 Factors that Affect Exchange Rates ................................................................................................................ 7 BALANCE OF PAYMENT ANALYSIS ........................................................................................................................ 11 BANGLADESHS BOP ............................................................................................................................................. 11 Current Account ........................................................................................................................................... 11 AUSTRALIAS BOP ................................................................................................................................................ 13 UNITED STATES BOP ............................................................................................................................................ 16 CROSS COUNTRY COMPARISON ................................................................................................................................ 19 RELATIONSHIP BETWEEN CURRENT ACCOUNT BALANCE AND CHANGES IN SAVING AND INVESTMENT .......................................... 21 CH:1- TRENDS IN DFI ............................................................................................................................................ 24 DFI IN BD AND AUSTRALIA ..................................................................................................................................... 25 DFI OPPORTUNITIES IN ASIA, EASTERN EUROPE AND LATIN AMERICA: ............................................................................... 26 CH:2- RECENT TRENDS IN US EXPORT AND IMPORT:............................................................................................ 27 ANALYSIS OF US EXPORTS: ...................................................................................................................................... 28 ANALYSIS OF US IMPORTS: ...................................................................................................................................... 29 CHANGES OVER THE BALANCE OF TRADE: .................................................................................................................... 29 Trade Balance Analysis ................................................................................................................................. 30 Reason of Changes ....................................................................................................................................... 30 TRADE BALANCE AND EXCHANGE RATE: ....................................................................................................................... 32 CH: 3 QUOTATION AND CROSS EXCHANGE RATE: ................................................................................................ 38 CH: 4-EXCHANGE RATE MOVEMENT IN RECENT MONTHS ................................................................................... 41 REASON FOR APPRECIATION OR DEPRECIATION ............................................................................................................ 42 MOVEMENT OF ASIAN CURRENCIES: .......................................................................................................................... 43 MOVEMENT OF LATIN AMERICAN COUNTRIES .............................................................................................................. 44 VOLATILITY COMPARISON OF AUD VS BDT ................................................................................................................. 45

PART-A Introduction

Country profile
United States of America USA is one of the strongest economic powers of the world. Its a democratic country and believes in capitalist mixed economy. Name of the capital of USA is Washington DC. Per capita GDP of this country is 49,965$ (World bank ) Currency name is US dollar ($) which is one of the most used International trade currencies in the world. One of the largest stock market New York exchange is also situated in this country. Market capital of this stock exchange is 16.613 trillion $ (New york stock exchange ). Federal Reserve System (informally know as Fed) act as a central bank of USA and responsible for economic development and stability. Current national budget deficit of USA is 901 billion $ (deficit) . Though USA is strong economic power but as after 9/11 they involved in two wars which creates economic problem Common wealth of Australia Australia is one of industrialized developed country of the w orld. Its a democratic country and practice free market economy. Capital name is Canberra. Per capita GDP of this country is 67,036$ (World bank ). Currency name of Australia is Australian dollar or AUD. Currently one AUD equals .91 US $. Australian stock market name is Australian security exchange (ASX).Market capital of this market is 1.5 trillion dollar (marketcap). Reserve bank of Australia is the central bank of Australia which is responsible for economic stability and development. Balance of trade of Australia is negative which mean they consume more than they export. Peoples republic of Bangladesh Bangladesh is a developing country. Its democratic country and practice mixed economy. Capital name is Dhaka. Per capita GDP of this country is 747$ (World bank ). Currency name is Bangladesh taka (BDT ). Currently one BDT equals .013$. Main stock market is Dhaka stock market (DSE). Market capital of DSE is 50.28$ billon. Bangladesh bank is the central bank of Bangladesh who ensures economic stability. Like all other developing country Bangladesh also faces budget deficit most of the year.

Theoretical Perspective
What is direct foreign investment (DFI)?
In a normal sense direct foreign investment is when a corporation or individual invest in other countries business or production partially or completely is known as direct foreign investment. When a corporation invest stock of other corporation which is outside of their parent country and gain controlling power can be also categorized as DFI. According to IMF and OECD definition, DFI reflects the aim of obtaining a lasting interest by a resident entity of one economy in an enterprise that is resident in another economy (duce, 2013 ). DFI gives benefit to the both party. Investing firm gets their desired outcome (example: may be cost benefit) and the host country gets tax and citizen of that country get opportunity of employment. Overall DFI gives positive signal to the economy of the host country and investing firm also gets international regeneration.

Why firm engaged in foreign direct investment?

Multinational corporations are now engaging more in DFI activity than before. According to BEA website, US firms and multinational company increases DFI more than 200% (BEA) from 2001 to 2012 (all industry and country). Other developed countries also increased their DFI. There are many reasons behind this rapid increasing trend. Cost advantage: There is a huge difference between wage structure of develop and developing country. A multinational firm can produce a product or service with much lower cost in

developing country. Firms are now realizing this and investing more in developing country as DFI. Many US based call Center Company invest in India and gain cost advantage. Countries like Bangladesh, Vietnam, Sri Lanka is getting DFI by the US and other multinational company mainly because of this reason. Factor of production: some factor of production is impossible to move from one country to another. Many multinational companies want to utilize those resources perfectly and invest on the country where factor of production is available. Many US and Canadian based company is looking for the opportunity to invest in Bangladesh just because of natural gas of Bangladesh. The factor natural gas is not t ransferable.

Tax and environment law: Some countries tax rate is very high. Many US company is shifting their activity to other country mainly because of this reason. Develop worlds government is now becoming conscious about their environment and creates a strict law about it. Many US base firms did DFI in Mexico just because of this reason. Mexican environment law is not as strict as US. So US base company produces goods in Mexico and then bring that good to US. Competition: when competition in the local market become very intense that time corporation looks opportunity in other parts of the world and when they find it they do DFI on that county. It saves the exporting cost and transporting cost. Uniliver Bangladesh is DFI of uniliver UK. Parents Company finds opportunity in this country so they did DFI in Bangladesh. Economic growth: when a countrys economy do well usually stock of local company do well also holding other fact constant. International investors always look for opportunity of gaining profit. Many US investors are also investing in other countries stock and some time they gets even controlling power which classified as DFI.

Components of Balance of Payments:

Balance of payments (BoP) accounts are an accounting record of all monetary transactions between a country and the rest of the world. These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers. The BOP accounts summarize international transactions for a specific period, usually a year, and are prepared in a single currency, typically the domestic currency for the country concerned . (Sloman, 2004, p. 516) Components of BOP are: Capital account, Cuurent Account and Financial account; Capital Account: are mainly consist of Trade buying and selling of goods and services, factors of income which are dividend or interest income or payment and Payment for transfers include remittances. Capital Account: The capital account is where all international capital transfers are recorded. This refers to the acquisition or disposal of non-financial assets (for example, a physical asset

such as land) and non-produced assets, which are needed for production but have not been produced, like a mine used for the extraction of diamonds. Financial Account: In the financial account, international monetary flows related to investment in business, real estate, bonds and stocks are documented. Also included are government-owned assets such as foreign reserves, gold, special drawing rights (SDRs) held with the International Monetary Fund (IMF), private assets held abroad and direct foreign investment. Assets owned by foreigners, private and official, are also recorded in the financial account. ( Source: Investopedia)

Concepts of Exchange Rate

Exchange rate is the rate at which a unit of the currency of one country can be exchanged for that of another country. In finance, an exchange rate (also known as a foreign-exchange rate) between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one countrys currency in terms of another currency (O'Sullivan 2013). Exchange rates can influence both the total amount of foreign direct investment that takes place and the allocation of this investment spending across a range of countries. Exchange rates play a vital role in a country's level of trade, which is critical to most every free market economy in the world. For this reason, exchange rates are among the most watched analyzed and governmentally manipulated economic measures. Direct Exchange rate: A foreign exchange rate quoted as the domestic currency per unit of the foreign currency. In other words, it involves quoting in fixed units of foreign currency against variable amounts of the domestic currency Indirect Exchange Rate: A foreign exchange rate quoted as the foreign currency per unit of the domestic currency. In an indirect quote, the foreign currency is a variable amount and the domestic currency is fixed at one unit. Bid Price vs ASK price: It is the Banks buying price of a foreign Currency. Ask is the selling price of foreign currency by a bank. The Margin of these two is called the bid/ask spread which calculation is [(Ask-bid)/Ask price]

Factors that Affect Exchange Rates

There are numerous factors that determine the exchange rate between two countries. The factors
are described below:

1. Inflation Rates
A country with low inflation rate compared to another country will see its currency appreciate compared to the other country. This is because in the country where the inflation rate is low, the prices of goods and services are increasing at a slower rate. That countrys exports will become more competitive thereby increasing the demand for that currency. At the same time the foreign goods in that country will become less competitive and imports will reduce, thereby decreasing the demand for the foreign currency. For example: If inflation in the UK is relatively lower than elsewhere, then UK exports will become more competitive and there will be an increase in demand for Pound Sterling to buy UK goods. Also foreign goods will be less competitive and so UK citizens will buy less. Therefore countries with lower inflation rate tend to see an appreciation in the value of their currency.

2. Interest Rates
A higher interest rate causes the countrys currency to appreciate. This is because the country with higher interest rates can offer better rates to lenders thereby attracting more foreign capital, which causes the exchange rates to rise. For example: If UK interest rise relative to elsewhere, it will become more attractive to deposit money in the UK. You will get a better rate of return from saving in UK banks; therefore demand for Sterling will rise. Higher interest rates cause an appreciation. 3. Speculation Speculation by major market operators is another crucial factor that influences exchange rates. In the forex market, the proportion of transactions that are directly related to international trade activities is relatively low. Most of the transactions are actually speculative trading which cause currency movement and influence exchange rates. When the market predicts that a certain currency will rise in value, it may spark a buying frenzy that pushes the currency up and fulfill the prediction. Conversely, if the market expects a drop in value of a certain currency, people will start selling it away and the currency will depreciate

4. Change in Competitiveness If British goods become more attractive and competitive this will also cause the value of the Exchange Rate to rise. This is important for determining the long run value of the Pound. This is similar factor to low inflation.

5. Relative strength of other currencies.

In 2010 and 2011, the value of the Japanese Yen and Swiss Franc rose because markets were worried about all the other major economies US and EU. Therefore, despite low interest rates and low growth in Japan, the Yen kept appreciating.

6. Balance of Payments
The changes in current account also impact the value of currency. A current account deficit indicates that the countrys value of imports is more than the value of exports. Therefore, to balance the trade it requires more foreign currency than it receives through exports. The country will therefore borrow foreign capital which will increase the demand for foreign currency and the domestic currency will depreciate. This can be changed only by either increasing exports by making the goods more attractive/competitive or by reducing imports.

7. Government Debt Under some circumstances, the value of government debt can influence the exchange rate. If markets fear a government may default on its debt, then investors will sell their bonds causing a fall in the value of the exchange rate. For example, Iceland debt problems in 2008 caused a rapid fall in the value of the Icelandic currency. For example, if markets feared the US would default on its debt, foreign investors would sell their holdings of US bonds. This would cause a fall in the value of the dollar.

8. Government Intervention
Sometimes even the governments can intervene to artificially maintain a currency value at a certain level. For example, China has kept its currency undervalued by buying dollars so that its exports are attractive. 9. Public Debt A country with huge public debt attracts less foreign capital. This is because high public debt leads to increase in inflation which erodes the countrys currency value. Additionally if there is a risk of default by the country, investors will sell their bond holding in the open market. This leads to a depreciation of the currency value. 10. Political Situation The stability of a foreign currency is closely related to the political situation of that place. In general, the more stable the country is, the more stable its currency will be. For our second example, if you have been observing the Euro, you would have noticed that for three consecutive months during the Kosovo War, the Euro fell by about 10% against the US Dollar. One of the reasons was the downward pressure on the Euro caused by the Kosovo War.

PART B
BALANCE OF PAYMET ANALYSIS

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Balance of Payment Analysis :

Bangladeshs BOP: (Detailed BOP showed in the appendix A-1)
In million TK 2007-08 Current Account Capital Account Financial Account 54958 39525 -20184 2008-09 145053 33454 -51420 2009-10 229561 33736 38106 2010-11 52753 41381 -101134 2011-12 89163 36785 -41602

Source: Bangladesh Bank Time series Analysis:

Current Account: Bangladesh having a positive current account balances throughout the last
five years. From the current account of BD the most significant positive contribution is seen by the transfer of payments and therefore BD having a positive current account balance even with a negative trade balance.

In the last year 2012 BD having a current account balances of 89163 million BDT which was 30,410 million BDT more than the fiscal year 2010-11. In the last Five years the highest balance of current account was in the fiscal year 2009-10 and could be because of the highest remittance

11

and lowest trade balance. Whereas the in the Fiscal year 2010-11 the balance was lowest because of the highest amount of imports.

Capital Account: In the capital account of BD the most significant contributor and only contributor is capital transfer

In the year 2011-12 BD capital account having a positive balance of 36785 million BDT which was 11.11% less than the capital account balance in the year 2010-11. Among the last Five years the highest capital account was transferred in the year 2010-11 and lowest was in the year 200809 might be because of the stronger dollar value against BDT or higher inflation rate. Financial account: The significant contributor of the Financial account is the DFI of Bangladesh and the fluctuation is mainly seen in the Portfolio Investment account.

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In the recent year 2011-12 the Balance of Financial account is the inflow of 41602 million BDT which is 142,736 higher out flow than the amount in the fiscal year 2010-11 and signifies more amount of financial inflow. The highest out flow of balance was in the year 2009-10 and lowest was in the year 2010-11 Trade Balance analysis: It is the component of Current account which has huge impact over the countrys balance of payment
Taka in million ITEMS 2007-08 2008-09 2009-10 2010-11 2011-12

1. Trade Balance 1.1 Export (f.o.b.) 1.2 Import (f.o.b.)

-366552 971101 -1337653

-323845 1071950 -1395795

-356379 1123451 -1479830

-521819 1641592 -2163411

-596667 1933755 -2530422

In the very last year 2011-12 the BD had highest trade deficit among the last 5 year analysis and the trend shows that the trade balance is declining signifying that the country having larger trade deficit years after wards. The significant change over the period was in 2010-11 from the year 2009-10. The reason is the BDT depreciation against the USD which made the Import expense double from the year 2009-10 to 2010-11.

Australias BOP: (Detailed BOP showed in the appendix A-2)

2007-08 Current Account -70171 2008-09 -37272 2009-10 -56018 2010-11 -33026 2011-12 -47576

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Capital Account Financial Account

2176 67337

-611 38750

-291 55054

-556 33446

-411 46639

Time Series Analysis: Current Account: Australia maintaining outflow of current account thus having a negative balance.

In the year 2011-12 the Australia having a current out flow balance of 47576 million US $ which is more than the previous year signifies a increase of 14550 million USD of current out flow. From the last five year analysis the Highest out flow balance was in the fiscal year 2007-08. The fluctuation here is more because of the balance of trade, which sometimes get positive and in some years get negative. Capital account: The Australian BOP consists of capital transfers and non-financial assets in the Capital Account. The country has normally a negative balance of capital account which signifies capital outflow more than inflow.

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In the year 2011-12 the country maintains a capital outflow of 411 million dollars which is lower than the previous years capital out flow. In the fiscal year 2007 -08 the country maintains a balance of capital inflow means a positive capital account balance besides in all other years there is a negative capital balance. Financial Account:

In the recent year 2011-12 and along with all the last 5 years Australia having an inflow of financing activities which means a positive balance of Financial account. In the very recent year the country is having a financial account balance of 46639 million USD which was increased by around 39% than the fiscal year 2010-11. In the year 2007-08 the company was the highest amount of DFI thus having the highest balance of Financial Account. Trade Balance:

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Balance Of trade 2007-08 $m Goods and Services Exports Imports -20619 234308 -254927 2008-09 $m 7353 284571 -277218 2009-10 $m -4621 253762 -258383 2010-11 $m 20962 297499 -276537 2011-12 $m -3072 315638 -318710

Even though having a negative current account balance, in the year 2010-11 and 2008-09 the country had a trade surplus and in other three years the country having trade deficit. In the very recent year 2011-12, Australia had a trade deficit if 30702 million USD. Although the export earning was the highest, the country also maintained a highest Import expanse in 2012 might be because of the better AUD position than USD.

United States BOP:

(Detailed BOP showed in the appendix A-3)
Year Current Account Capital Account 6010 -140 -157 -1212 6956 2008 -681343 2009 -381636 2010 -449471 2011 -457725 2012 -440416

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Financial Account

730568

231019

438044

551708

439351

Time Series Analysis: Current Account: USA maintaining outflow of current account thus having a negative balance. The negative balance here signifies that US is a country generally have maintain a trade deficit.

In the very Last fiscal year the current account balance of USA was 440416 million cash out flow which was around 3.78% lower outflow than the fiscal year 2011. The highest out flow of Balance or current account was in the year 2008 which was because of the stronger US dollar position, and Import was more and the decline of balance in 2012 was attributed to the more export earnings. Capital Account: In the capital account of USA, the most significant contributor and only contributor is capital transfer

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In the last fiscal year the US having a credit balance of capital account which is 6956 million USD. In the previous year 2011, the capital account has a out flow balance and in this year thus the US having receipts of capital transfer payments and among the last 5 year analysis 2012 having the highest capital inflow which caused by the patents or trade marks income. Financial Assets account: US having a large portfolio of financial account other than any countries and having an inflow of Financial account balance means positive Balance over all the last 5 years.

In the last fiscal year 2012 US having a financial account balance of 439351 million dollar which was around 20% lower than the previous year balance. In the year 2008 US having the highest

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inflow of financial accounts because of having the highest interest rate which make the country to invest more easily and gain higher return. Trade Balance account: It is the component of Current account which has huge impact over the countrys balance of payment
[Millions of dollars] 2008 Trade Balance Exports Of goods and services Imports of Goods and services -702302 1840332 -2542634 2009 -383657 1578187 -1961844 2010 -499379 1844468 -2343847 2011 -556838 2112825 -2669663 2012 -534655 2210585 -2745240

Unites States account maintain a trade deficit which explains that the amount of Imports is greater than the amount of export for the United States. In the year 2012 the balance deficit was 534655 million USD which was around 3.98% lower deficit than the year 2011. In the year 2008 US having a higher budget deficit because of highest imported good and services for the stronger dollar position which benefited the importer over the exporter within a economy.

Cross Country Comparison:

Here we compare the BOP main components which are the current account, capital account and financial accounts over the countries which are United States, Australia and Bangladesh

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Current accounts: (compare the balances are in million USD)

Among the three countries BD has the lowest outflow of current account balance whereas the US has the highest out flow of current balance. By this we can also draw the foreign operation of the countries, where US has the highest operational position. Australia having great exposure to the foreign operation but for having a very positive export earning the Current outflow is lower. Capital Account: (compare the balances are in million USD)

Among all the three countries only Bangladesh having a capital inflow over the five years and Australia having constant out flow of capital balance from the last 5 years. United states have the highest capital outflow in the year 2012.

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Financial Account: (the balances are in million USD)

Among all the three countries only Bangladesh having a negative balance of Financial account which shows outflow of balances for financial assets. The United States has the highest inflow of financial assets than Australia. Mainly because of the lucrative security option and derivatives countries are eager to invest to the US financial assets, but in the year 2012 the US having a decrease in the financial assets inflow where Australia having a positive trend might because of the AUDs better position than USD.

Relationship between Current account Balance and Changes in Saving and Investment:
The relation among the current account, saving and investment can be explained by the following equation: GDP = gross domestic product. The definition of gross national disposable income (GNDY) is GDP plus net primary and secondary income from abroad, so GNDY = C + G + I + X M + BPI + BSI, (1) Where,

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BPI = balance on primary income BSI = balance on secondary income (net current transfers) The current account balance is: CAB = X M + BPI + BSI (2) Where, CAB = current account balance From equations (1) and (2), the current account balance can also be seen equivalently as the gap between disposable income and expenditure: CAB = GNDY C G I. (4) Or equivalently: GNDY = C + G + I + CAB. (5) As defined in the SNA use of income account: S = GNDY C G, (6) Where, S = gross saving. Substituting identity (1) in (6), S = I + CAB, (7) Which can be rearranged as: S I = CAB. (8) That is, the current account balance is the gap between saving and investment.

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Thus, the current account balance mirrors the saving and investment behavior of the economy. In analyzing changes in the current account balance of an economy, it is therefore important to understand the manner in which these changes reflect movements in saving and investment. As an increase in investment relative to saving will have the same impact on the current account at least in the short runas a decline in saving relative to investment. The main relation of CA balance change and Saving and investment is If a nation is earning more than it spends the net effect will be to build up savings, except to the extent that those savings are being used for investment. If consumers can be encouraged to spend more instead of saving; or if the government runs a fiscal deficit to offset private savings; or if the corporate sector divert more of their profits to investment, then any current account surplus will tend to be reduced. (Wikipedia)

PART-C
Conceptual Implications

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Ch:1- Trends in DFI

US has a major of their portion in the direct investment in many other countries. For being technologically advanced the US firms have major of the DFI in the technology related industries. But there are also many other industry where us firms having DFI. The detailed of the DFI abroad by us firms along with Industry showed in the appendix. In the table below the Total DFI abroad by US firms in all industries given below. In million of Dollar Direct investment position on a historical-cost basis 2009 All industries Source: bea 3,565,020 2010 3,741,910 2011 4,084,659 2012 4,453,307

The following diagram represent tht direct foreign investment (DFI) abroad by US firms from year 2009-2012. The horizontal axis represents the time periods and the vertical axis represents the investment amount in US dollar. The DFI for year 2009 was 3,56,020 million dollar and it grow 4,084,659 million dollar in 2012. According to the DFI index ranking for 2011 United

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States remained a strong magnet for FDI in the world economy. The DFI in summation is having a upward trend and in the year 2012 the DFI increased by 9.03% from the year 2011.

DFI in BD and Australia:

In million of dollar Direct investment position on a historical-cost basis 2009 2010 2011 2012 3,565,020 3,741,910 4,084,659 4,453,307

All countries

Australia Bangladesh

106,212 331

125,421 296

137,261 0

132,825 368

Direct Foreign Investment in the Bangladesh

There is no regular trend in the flow of FDI in BD by US firms. In the recent year 2012 the DFi to BD by US firms are only 368 million USD where as we can see in the previous year there is no proper amount of DFI invested by US Firms to disclose thus having a balance of 0. Among the last $ year in the year 2012 having the highest amount of DFI. DFI in Australia:

In the other hand we can see US firms having a huge amount of DFI in the country Australia. In the total Asia and pacific subcontinent the Australia having a major portion of DFI ( showed in

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the appendix). In the year 2012 the FDI in Australia was 132 825 million USD which is slightly below the FDI in 2011 which was around 3.24% more than the recent year DFI The tremendous gap might be because of the currency strength of Australia with USD compare with BDT. Also some other factors like technology advantage, availability of the potential market of US products and having a better market situation, also lower interest rate and availability of investment, trade barriers can be the reasons.

DFI opportunities IN Asia, Eastern Europe and Latin America:

Direct investment position on a historical-cost basis 2009 ALL countries Asia and Pacific Latin America 3,565,020 502,826 718,478 2010 3,741,910 570,111 752,788 2011 4,084,659 606,174 807,362 2012 4,453,307 651,305 869,268

Eastern europe

98,546

91,268

105,628

110,992

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The following diagram represents that direct foreign investment (DFI) of Asia, Latin America, and Eastern Europe from year 2009-2012. The horizontal axis represents the time periods and the vertical axis represents the investment amount in dollar. According to the diagram Latin America has the highest outward investment from US compared to Asia and Eastern Europe. US firms are pursuing FDI opportunities in all these zones as because all are showing an upward trend for US firms which indicates a potentiality of future growth and emerging market growth. But in comparision eastern Europe have more growing opportunities because of having lower amount of FDI but showing a upward trend.

Ch:2- Recent Trends In US export and Import:

Period Total
October'12 November'12 December'12 January'13 February'13 March'13 April'13 May'13 June'13 July'13 August'13 September'13 182,655 185,220 188,686 186,607 186,698 184,578 186,941 186,487 190,528 189,332 189,295 188,909

Exports Goods (1)

127,987 129,667 132,685 130,610 131,002 129,093 130,907 130,029 133,811 132,692 132,327 132,114

Imports Services
54,668 55,552 56,002 55,997 55,696 55,485 56,034 56,458 56,717 56,640 56,968 56,795

Total
225,304 231,641 226,994 228,971 230,180 221,365 226,460 230,212 225,071 227,974 227,996 230,687

Goods (1)
188,346 194,529 189,866 192,079 193,385 184,697 189,435 193,099 187,865 190,793 190,601 193,393

Services
36,958 37,112 37,127 36,892 36,794 36,667 37,025 37,113 37,206 37,181 37,395 37,293

Source: US. Department of Commerce (2013)

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Analysis of US exports:
In the very recent month, September 2013, the amount of total export by the US firms is 188,909 million us dollars from where the amount of goods exported was 132,114 million USD and service exported was 56,795 USD. This export amount is .20% less than the total export in the month august 2013 reflecting .16% decrease in the goods exported and .30% decrease in the service exported. If we consider the average change of the total export then there is a positive trend with a mean of .30% positive change in consideration with the last 12 months. Also from the analysis of the last 1 year means if we take the amount of exports of the month October, 2012, which was 182,665 million US$ then in the present time, September, 2013 there is a positive change of around 3% (referred to the calculation in soft copy Book.1.xls). From the analysis we can say that even in the last month the export was decreased in the dollar amount but from the 1 year basis the amount of export in monetary terms increases. Moreover the trend is not clear because though the variance of change around the years the exporting by US firms fluctuating. The decrease in exports of goods reflected decreases in industrial supplies and materials, in other goods, and in consumer goods that were mostly offset by an increase in foods, feeds, and beverages. The decrease in exports of services reflected a decrease in travel. An increase in other transportation, which includes freight and port services, was partly offsetting.

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Analysis of US imports:
In the very last month, September, 2013 the imports of goods and services were 230,687 million USD which is increased 2,691 million from the last years. Among the imported amount the good imported by US firms were 193,393 million USD and services imported were 37,293 million USD and the importing of goods were increased by 1.46% whereas the importing of service decreased by 0.27% Even from the last month analysis with the previous month there showed an upward trend, from the last 12 months the amount of imports in monetary terms was fluctuating with a little of variance. The largest increases in imports of goods were in industrial supplies and materials, in automotive vehicles, parts, and engines, and in capital goods. The decrease in imports of services reflected a decrease in travel

Changes over the Balance of Trade:

In millions of dollars

Period Total
October'12 November'12 December'12 January'13 February'13 March'13 April'13 May'13 June'13 July'13 August'13 September'13 -42,650 -46,422 -38,307 -42,364 -43,481 -36,787 -39,519 -43,725 -34,543 -38,642 -38,701 -41,778 8.84% -17.48% 10.59% 2.64% -15.40% 7.43% 10.64% -21.00% 11.87% 0.15% 7.95%

Balance of Trade % Change Goods (1)

-60,360 -64,862 -57,182 -61,469 -62,383 -55,605 -58,528 -63,070 -54,055 -58,101 -58,274 -61,279 7.46% -11.84% 7.50% 1.49% -10.87% 5.26% 7.76% -14.29% 7.48% 0.30% 5.16%

% Change

Services
17,710 18,440 18,874 19,105 18,902 18,817 19,009 19,345 19,511 19,459 19,573 19,502

% change
0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01%

Source: US. Department of Commerce(2013)

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Trade Balance Analysis:

The in the recent month of September 2013 the trade balance of the US had a deficit of 41,778 million USD which was increased from the previous month August 2013. Over the last 12 months the US economy continuously facing a balance of deficit in the trading of goods and services and was calculated by the total Export-Import. The US trade deficit had not maintain any particular trend and was fluctuating over the last 12 months but with a moderate variations. The positive percent change here shows high amount of trade deficit from the last months and negative percentage changes reflects lower in the trade deficit.

Reason of Changes
As there is an increase in the Import of goods and services from the last month and a decrease in the exporting of goods and services the deficits increased over time. From the percentage change in the table we can claim that the US deficit changes normally because in the change of the net balance goods as services changes are not that significant for the US economy. There are three major determinants of the trade balance or net exports: Foreign exchange rates, national incomes, and domestic and foreign price levels. Effects of exchange rate movements The way the foreign exchange rate affects exports and imports has already been discussed in fair detail. In a nutshell, if the U.S. dollar appreciates (the dollar becomes stronger and the foreign

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exchange rate increases), exports decline and imports increase, causing the foreign trade deficit to rise. If the dollar depreciates (the dollar becomes weaker and the foreign exchange rate decreases), the foreign trade deficit falls. Effects of changing in domestic and foreign Income: Changes in national incomes in foreign countries as well as in the United States have an important effect on net exports. If national incomes in foreign countries rise, foreign residents demand greater amounts of goods and services, some of which can be bought from the United States. As a result, an increase in incomes in foreign countries leads to an increase in U.S. exports, causing the foreign trade deficit to rise (assuming other factors do not change). If national incomes in foreign countries fall, U.S. exports to these countries will decline, leading to a decline in the foreign trade deficit as well. Changes In the economic indicators: Changes in the interest rate cause a change in the export and import Changes in the monetary policies affects the interest rate and cause the trade balance to change According to the beauro of economist(BEA) the changes in the US trade deficit in the very recent month September 2013 are attributed for the following reasons: The goods deficit with the European Union decreased from $9.8 billion in August to $8.0 billion in September. Exports increased $1.2 billion to $22.8 billion and imports decreased $0.6 billion to $30.8 billion. The goods deficit with China increased from $29.9 billion in August to $30.5 billion in September. Exports increased $0.3 billion to $9.6 billion and imports increased $0.9 billion to $40.1 billion. The goods deficit with Canada increased from $2.4 billion in August to $3.2 billion in September. Exports decreased $0.5 billion to $24.9 billion and imports increased $0.3 billion to $28.2 billion.

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Trade balance and exchange rate:

BD and US perspective General explanation of trade balance change is that a change in the exchange rate caused in a change in the balance of trade. If there is a positive trend, means if the foreign currency if weaker in comparison with domestic currency, there are more import than export of goods and services which cause Trade deficit. On the other hand if the foreign currency is stronger than domestic currency there will be more export earnings and import will be less which gives a trade surplus. But change in the exchange rate not always gives us the desired change in the balance of trade and for this analysis we draw regression Bangladesh is one of the major countries for US to have import from. USA have a lot of import from Bangladesh because of the BDTs weaker position in relation with the USD. So major part of US trade deficit is attributed to the trading decision from Bangladesh. [detail export and import from bagladesh by US firms are showed in the appendix. ] For overlooking the relation of trade balance change with the direct exchange rate1 of US and BDT, we took data from the last 25 months, September 2011 to September 2013. 2 For the regression we took the percentage change of exchange rate as independent variable and percentage change in the trade balance as dependent variable which signifies trade balance change is a function of changes in the exchange rate

1 2

The direct exchange rate derived from the website www.oanda.com/currency-converter For calculation of balance change referred to the soft copy titled Book.2.xls

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Regression Analysis of BD Trade balance with exchange rate:

Balance of Trade between US and BD Month Trade Balance(in millions of U.S. dollars) -324.1
-176 -148.8 -244.3 -447.8 -405.5 -402.3 -397.5 -335.6 -335.2 -426.8 -397.4 -350.5 -316.1 -335.5 -264.3 -464 -396.6 -394.3 -369.1 -384.1 -349 -444.2 -472 -366.5

% change in trade balance

Direct Exchange rate of Each month Begging 0.0133

% change in exchange rate

Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13

-0.4569577 -0.1545455 0.6418011 0.8329922 -0.0944618 -0.0078915 -0.0119314 -0.1557233 -0.0011919 0.2732697 -0.0688847 -0.1180171 -0.0981455 0.061373 -0.2122206 0.7555808 -0.1452586 -0.0057993 -0.0639107 0.0406394 -0.0913825 0.2727794 0.0625844 -0.2235169

0.0131 0.013 0.0128 0.012 0.0117 0.0118 0.012 0.012 0.012 0.0121 0.012 0.0121 0.012 0.0121 0.0121 0.0123 0.0124 0.0125 0.0125 0.0126 0.0127 0.0129 0.0127 0.0126

-0.015037594 -0.007633588 -0.015384615 -0.0625 -0.025 0.008547009 0.016949153 0 0 0.008333333 -0.008264463 0.008333333 -0.008264463 0.008333333 0 0.016528926 0.008130081 0.008064516 0 0.008 0.007936508 0.015748031 -0.015503876 -0.007874016

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SUMMARY OUTPUT Regression Statistics Multiple R 0.2497308 R Square 0.0623655 Adjusted R Square 0.0197457 Standard Error 0.3071634 Observations 24 ANOVA df Regression Residual Total 1 22 23 SS MS 0.138061411 0.138061411 2.0756855 0.094349341 2.213746911 Standard Error F 1.4633 Significance F 0.239244

Coefficients Intercept X Variable 1 0.0334265 -4.5283354

t Stat

P-value

Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

0.063193439 0.528954957 0.602133 3.743448517 1.209669467 0.239244

-0.09763 0.164482 -12.2918 3.235102

0.09763 0.16448 12.2918 3.23510

From the summery output we can see that the so-called slope-coefficient is abut -4.5283, which suggests that every 1 percent change in the Direct exchange rate is associated with a 4.5283 percent negative change in the Balance of trade. This also tells that if there is a positive change

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in the BDT amount the balance of trade will be negatively change which means the balance of trade increase and deficit will decrease for this situation signifies the import earnings will be higher and export earnings will lower. The t-statistic is estimated to determine whether the slope co-efficient is significantly zero. Since the standard error is about 3.75344, the t-statistic is -.45283/3.75344 = -1.20. This would imply that the relationship is not that much significant. The major part of interpretation here is the value of R2. The statistics suggest that the value major the variability measurement. Here the value is 0.0623655 which is a very low amount and can reject the relation. This tells that 6% of the variation in the trade difference is explained by changes in the exchange rate. So there is a possibility of having lag or lock up period of the US firms for export or import of goods and services by which the trade balance less respond only because of the change in the currency appreciation or depreciation. Australia and US perspective: We also calculate the relation of currency change with the trade balance considering United States and Australia. The previous county BD was an import base country from US perspective where US having more export earning to Australia and less import from Australia showing a balance of trade surplus3 Regression Analysis of BD Trade balance with exchange rate:
Balance of Trade between US and Australia Month Trade Balance(in millions of U.S. dollars)
1,436.60 2,178.80 1,520.90 1,657.10 1,573.00 1,698.00

% change in trade balance

Direct Exchange rate of Each month Begging 1.0683

% change in exchange rate

Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12

3

0.516636503 -0.301955205 0.089552239 -0.050751313 0.079465989

0.974 1.059 1.0096 1.0203 1.0628

-0.088271085 0.087268994 -0.046647781 0.010598257 0.041654415

Detailed import and export with Australia and us is showed in the Appendix part from the year 2011 to 2013 present.

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Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13

2,034.00 1,600.40 1,732.60 1,933.60 2,049.80 1,804.60 1,917.70 1,812.10 1,783.40 1,662.70 1,194.90 1,324.90 1,487.30 1,076.20 1,380.70 1,736.50 1,462.50 1,405.40 1,466.00

0.197879859 -0.213176008 0.082604349 0.11601062 0.060095159 -0.119621426 0.062673169 -0.055065964 -0.015837978 -0.067679713 -0.281349612 0.108795715 0.122575289 -0.276406912 0.282939974 0.257695372 -0.157788655 -0.039042735 0.043119397

1.08 1.0343 1.0436 0.9721 1.0234 1.0513 1.0311 1.0375 1.0377 1.0424 1.0383 1.0416 1.0252 1.0416 1.0352 0.9619 0.9133 0.9014 0.8893

0.016183666 -0.042314815 0.008991589 -0.06851284 0.052772349 0.027262068 -0.019214306 0.006206963 0.000192771 0.004529247 -0.003933231 0.003178272 -0.015745008 0.015996879 -0.006144393 -0.070807573 -0.050525003 -0.013029673 -0.013423563

SUMMARY OUTPUT Regression Statistics Multiple R 0.469059393 R Square 0.220016714 Adjusted R Square 0.184562928 Standard Error 0.174476525 Observations 24 ANOVA df Regression Residual Total 1 22 23 SS 0.188915269 0.669725268 0.858640537 MS F 0.188915269 6.205733 0.030442058 Significance F 0.020765

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Intercept X Variable 1

Coefficients 0.003094461 2.242060183

Standard Error 0.036140287 0.90001705

t Stat P-value 0.085623598 0.93254 2.491130787 0.020765

Upper Lower 95% 95% -0.07186 0.078045 -4.10858 -0.37554

Lower 95.0% -0.07186 -4.10858

From the summery output we can see that the so-called slope-coefficient is about -2.24, which suggests that every 1 percent change in the Direct exchange rate is associated with a 2.24 percent negative change in the Balance of trade. This also tells that if there is a positive change in the AUD amount the balance of trade will be negatively change which means the balance of trade increase and deficit will decrease. The t-statistic is estimated to determine whether the slope co-efficient is significantly zero. Since the standard error is about .90, the t-statistic is -2.24/.90 = -2.49. This would imply that the relationship is not that much significant but more significant than the last regression. The major part of interpretation here is the value of R2. The statistics suggest that the value major the variability measurement. Here the value is 0.22 which is a very low amount and can reject the relation. This tells that 22% of the variation in the trade balance difference is explained by changes in the direct exchange rate. So there is a possibility of having lag or lock up period of the US firms for export or import of goods and services by which the trade balance less respond only because of the change in the currency appreciation or depreciation.

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Ch: 3 Quotation and Cross Exchange Rate:

Here, 1 Japanese Yen= .0098 USD 1 Euro= 1.3553 USD So, 1 USD= 1/.0098 Japanese Yen = 102.0408 Japanese Yen And, 1 USD= 1/1.3553 Euro = .7378 Euro Therefore, .7378 Euro= 102.0408 Japanese Yen Or, 1Euro= 102.0408/.7378 Japanese Yen = 138.3041 Japanese Yen But according to the table in yahoo, 1 Euro= 138.9881 Japanese Yen So, 1 Japanese Yen= 1/138.9881 Euro = .0072 Euro

Historical Trend of the Direct Exchange Rate of Euro:

Source: http:finance.yahoo.com/currency

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This graph generally illustrates upward trend that revels the appreciation of euro in terms of USD dollar. Because, in January 2009, 1 euro= 1.29 USD; where in November 2013, 1 euro= 1.34 USD. It means euro is appreciated against USD dollar over that period of time. However, during the time between 2009 and 2013, there are several major fluctuations in the exchange rate movements of euro. Historical Trend of Indirect Exchange Rate of Euro:

Source: http:finance.yahoo.com/currency

This graph demonstrates downward trend that indicates the appreciation of euro in term of USD. In January 2009, 1 USD= .77 Euro; where in November 2013; 1USD=.74 Euro. It means the value of currency euro is increased against USD for a period of 2009 to 2013. However, within this time, there are many fluctuations in the exchange rate movement.

From the above two graphs, it has been observed that the trend of indirect exchange rate is opposite of the trend of direct exchange rate. It suggests, at a same point of time, if trend of direct exchange rate goes upward; then trend of indirect exchange rate must goes downward and vice versa. Approximate Percentage Change in Euro Over the Last One Year (From November 2012 to November 2013) = (1.34-1.27)/1.27 = .0551181 = 5.51% 1Euro= 1.4479 CAD (Canadian Dollar)

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Source: http:finance.yahoo.com/currency

From the graph, it has been showed that over the last five years euro generally depreciated against the Canadian dollar. Because, initially in January 2009, 1 Euro= 1.62 CAD; where, in November 2013, 1 Euro= 1.42 CAD. It means, value of Canadian Dollar increases relative to Euro over the period as it takes less Canadian Dollar now to get a Euro than past. Here, bid price of euro is 1.4479 Canadian dollars and ask price is 1.4483 So, Percentage Bid/Ask Spread = (Ask Rate Bid Rate) / Ask Rate * 100 = (1.4483 1.4479) / 1.4483 * 100 = 0.028% Direct Exchange Rate of Euro: 1 Euro= 1.3553USD Indirect Exchange Rate of Euro: 1 USD= .7378 Euro There is a reciprocal relation between direct exchange rate and indirect exchange rate of euro. In Bloomberg website, it has been given that Japanese importers require 92.4020 Japanese Yen to convert it in an Australian Dollar for purchasing Australian products at 4 th December, 2013. And 0.0108 Australian Dollars are equal to one Japanese Yen. In the both case of measuring the cross exchange rate between Australian Dollar and Japanese Yen, there is a reciprocal relation between two measurements.

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N.B. All the data are retrieved on 4th December 2013.

Ch: 4-Exchange rate movement in recent months

AUD per USD Month Sep-13 Oct-13 Nov-13 Rate 0.9303 0.9519 0.9324 0.023218317 -0.020485345 % change Rate 76.3765 76.2753 76.4057 -0.00132501 0.001709597 BDT per USD % change

source: foreign exchange rate,(dec 2, 2013)

The above currencies are showed in the indirect quotations reflects the average rates of exchange rate. The Bangladeshi taka and Australian dollar are here showed against the US dollar to measure the currency appreciation or depreciation of USD against the foreign currency. In the month of November we can see that for 1 USD we have the indirect rate of 76.4057 BDT. This shows that from the previous month October, the USD appreciated. This also tells that the BDT is depreciated in value against USD and the amount is the highest against the USD in the last 3 months. Therefore we can say that the BDT grown weaker in the month of November.

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On The other Hand USD indirect rate for AUD is less than the previous month. This signifies that the AUD value is appreciated where the dollar value is depreciated against the AUD. But the rate in the month of September 2013 was the lowest in amount which means in the month of September the AUD was stronger than the other two month. But in the recent month perspective it can be concluded that the Australian currency is appreciated and getting stronger against USD.

Reason for Appreciation or Depreciation:

The reason for any country exchange rate to appreciate or depreciate is totally depend on the supply and demand of loanable funds, inflation and interest rate. In the recent month November the BDT depreciate against US dollar, and this can be caused because of the rising inflation which decrease the BDT value. In the month of November the inflation rate was 7.15% which was increased from the last month October which having Inflation of 7.03%. (Bangladesh Beauro of Statistica)

Where the AUD appreciate against USD, and possible reason might be the decrease in the rate of inflation which was decreased by .02% in the month November from the last month according to the Australian Bereu of Statistics.

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There might be other reason like the increase or decrease in the interest rate change in relation with the change of US interest rate.

Movement of Asian currencies:

For the analysis of currencies movement of Asia subcontinent with the US dollar we took the Indian currency, rupee, Japanese currency, yen, and Malaysian currency Ringgits. Because in the Asia these currency are more dominating across the globe. From the general consideration we can see that in the last one year the most volatile currency against dollar was Indian rupee and less frequent movement was seen in the Japanese yen; reason might be the strong monetary policy, less interest rate movement and very little inflation for less movement and vise versa for the Indian rupee.

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Analysis:
china China India Malaysia 1 0.386097 0.515962 1 0.781826 1 India Malaysia

Fig: co-relation of the currency movement To see the Asian currency movement with the Dollar the co-relation measurement is used by calculating the changes over currency movements from the last 1 year. (Calculation is showed in the appendix ). From the co-relation we can conclude that all the three Asian currencies are move in the same direction along with the dollar movement. But the sensitivity of the currencies are different. We can see that the Indian currency move very positively and more aggressively with the dollar than the other currencies. All the three currencies are having positive co-relating along each other and the currencies are all quoted in direct exchange rate positive movements of the currencies showing they are move in the same direction with dollar changes.

Movement of Latin American countries:

For the analysis of currencies movement of Latin America with the US dollar we took the Brazilian real, Venezuelans Bolivar and Mexican currency Ringgits. Because in the Asia these currency are more dominating across the globe. From the general consideration we can see that in the last one year the most volatile currency against dollar was Mexican peso and less frequent movement was seen in the Bolivar. The bolivar is strictly controlled by the government of Venezuela thus the rate is not a floating one.

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Analysis of movement:
brazil brazil venezuala mexico 1 -0.30739 0.687294 venezuala 1 -0.02401 mexico

Fig: co-relation of the currency movement In the part of Latin America the bolivar do not move in the same direction with the ther currency thus having a negative co-relation with both peso and real. But the other two currency have positive co-relation which signifies that these are moving in the same direction with the movement of dollars. But the movement response is seen more aggressive in the changes of Mexican peso with the other two by having the highest positive co-relation.

Volatility Comparison of AUD vs BDT

Period Rate Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13

BDT Direct Exchange rate % change 0.012 0.0121 0.0121 0.0123 0.0124 0.0125 0.0125 0.0126 0.0127 0.0129 0.0127 0.0126 0.008333333 0 0.016528926 0.008130081 0.008064516 0 0.008 0.007936508 0.015748031 -0.015503876 -0.007874016

AUD direct exchange rate Rate 1.0375 1.0377 1.0424 1.0383 1.0416 1.0252 1.0416 1.0352 0.9619 0.9133 0.9014 0.8893 0.000192771 0.004529247 -0.003933231 0.003178272 -0.015745008 0.015996879 -0.006144393 -0.070807573 -0.050525003 -0.013029673 -0.013423563 % change

Standard Deviation =

0.009641681

0.025429406

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The volatility of a currency is measured by calculating standard deviation of the currency changes among different months. From the calculated standard deviation the AUD having the value of 2.54% and BDT having standard deviation of .96%. By the result we conclude that AUD having more variation than BDT. This signifies that the changes over the AUD direct exchange rate is more frequently move in the last 12 months than BDT. So the AUD is more volatile than BDT.

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