In international finance, the most important issues for us to understanding is what factors that affect prices of a goods and how it would influence the foreign exchange rate and causes the change in term of trade and thus affecting the whole economies. Prices of goods can be distinguished into absolute prices and relative prices. Absolute price is the number of dollars that can be exchanged for a specified quantity of a given good and is expressed in currency terms while relative prices is the quantity of some other good that can be exchanged for a specified quantity of a given goods. For example, the absolute price of good in Singapore is the number of dollars necessary to purchase a unit of good in Singapore. The relative price of good in Singapore in term of Malaysia is the amount of good in Malaysia necessary to purchase a unit of good in Singapore.(Home.ubalt.edu, 2018)In this essay, we will mainly focus on factors that affecting the relative prices of goods. There are several factors that will affect the price of goods such as interest rates in a country, inflation rates, government policy, term of trade and so on. I will discuss in depth of how does change in inflation or recession in a country and term of trade can affect the exchange rate and overall affect the economies.When the price of goods and services in a country rising over time, it is called inflation. The measure of inflation is referred to as the inflation rate. It’s an economics term that means you have to spend more to buy a goods compare to the old days. For example, a bar of chocolate in year 2000s is 3 dollar while in year 2010 is 8 dollar, this will cause the consumer to spend more to buy the same thing. Therefore, it is said that the purchasing power of consumer decreases. In order to keep the economy running smoothly, central banks will try to limit inflation and prevent recession. (The Balance, 2018) Inflation happens when most prices in the economy as a whole have been risen to some extent. This is caused by some factors, each related to the basic economic principle of supply and demand changes such as increase in the money supply, decrease in the demand for money and so on. (Heakal, 2018) For example, when the prices of goods in America increase, it will cause the demand for US currency decrease. This is because as prices is higher, other country do not want to buy US products and therefore the demand for US dollar is decrease. At the same time, the supply of US Dollar is going to increase as the people in America would prefer not to buy their owns products as there is higher prices but will choose to buy some products from another country, so there will be excess supply of US Dollar. Therefore, cause the US Dollar depreciated.As shown in the graph above, P1 is the price intersect S1(supply) and D1(demand). When there is inflation in United States, the demand for US Dollar will fall and shift to the left as D2. The supply will increase and shift to the right as S2. Finally, the new demand and supply will intersect at a lower price which is P2. The exchange rate falls from P1 to P2 and thus the currency of United States is said to be depreciated. Therefore, a higher inflation in domestic currency means that higher exchange rate.2.1.1 Comparison of inflation rate between Singapore and MalaysiaFrom the graph below, we can observe that Malaysia inflation rate in 2017 is higher than Singapore. In January 2017, we can seen that Singapore inflation rate is only 0.6 but Malaysia is 3.2 higher than Singapore. Therefore the exchange rate in 31 January is 1 SGD = 3.12010 MYR. In March 2017, Malaysia had the highest inflation rate among the whole year which is 5.1 but Singapore only 0.7. Therefore the exchange rate in 31 March is 1 SGD = 3.16270 MYR. (All the information resource is in appendix) Overall, we can conclude that higher inflation rate, the currency depreciated more.According to (Pettinger, 2017), the republic of Zimbabwe attained independence on April 18, 1980. After independence, Mugabe’s government replaced the Rhodesian dollar with the Zimbabwean dollar. In the late 1990s, the government introduced a series of land reforms that concerned in redistributing land from the existing white farmers to black farmers. As the black farmers had no experience in farming and therefore led to a large fall in food production, this had worsen the economic situation in the country and caused a collapse in bank sector. Therefore, the government start to print money and increasing the money supply. They started print money to finance a war in the Second Congo War and also to increase salaries of officials and soldiers. However, poor economy increased government debt, to finance the higher debt, the government printing more money again. Due to the decline in output, there were shortages of goods and as the newly printed money began flooding the market, prices of goods keep rising and cause hyperinflation. The worst of the inflation occurred in 2008, leading to the abandonment of the currency. In November 2008, there is an estimated of 79,600,000,000% per month hyperinflation occurred and thus the government eventually stopped printing Zimbabwe dollars and adopted the use of foreign currency. Term of trade (TOT) is a term that represents the prices of the exports of a country, relative to the prices of its imports. Calculation of TOT is using the average price of exports index divided by the average price of imports index and multiplying by 100.When TOT is less than 100%, it means that more capital is going out whereas TOT is greater than 100%, more money is coming in. For example, if the index of export prices rises by 10% and the import index prices rises by 5%, the TOT is (110/105)*100 = 104.8 meanings that the TOT have improved by 4.8%, for every unit of exports sold it can buy more units of imported goods. (Staff, 2018) Therefore, it can be concluded as export index prices goes up, term of trade will increase too.2.3 Government interveneWhen a country is facing inflation or recession, the government will try to intervene the exchange rate by applied some policy or control the money supply of the country. It is common for government to buy or sell the domestic currency in order to stabilize the country currency. However, government intervene is only suitable in short term but unable in the long term. When a country is having a high inflation rate, there are several methods to control inflation such as implemented monetary policy or fiscal policy, control wages, supply-side policies and so on. For example, when government using a contractionary monetary policy, it can be carried out by three ways which are selling securities or government bond, increase reserve requirements and directly reduce the money supply. (Economicshelp.org, 2018)Based on the graph above, when the government wish to control inflation rate, it would raise the cash reserve ratio of the banks. When there is a higher cash reserve ratio, means that banks have to keep more cash reserve with the Central Bank. The more reserve Central Bank are required to hold back, the less money they have less to lend. Therefore the money supply in the economy declines, LM shift to the left at LM1. The interest rates will rise up and less people intend to borrow money as cost of borrowing increase and finally lead to lower economic growth and lower inflation. (Economics Discussion, 2018)2.3.1 Real cases of monetary policy implementationThe most successful implementation of monetary policy is take place in 1982 at the United States. It is the anti-inflationary recession caused by the Federal Reserve and guided by Paul Volcker. The US economy of the late 1970s was bad, it experienced rising inflation and rising unemployment. The inflation rate in 1965 is only 1% but increase to 14% by 1980. Therefore, Volcker took the radical step to shift the Fed’s policy from targeting interest rates to targeting money supply and finally ease the problem that faced by the country. (Investopedia, 2018)3. ConclusionThere are quite a lot of factors can affect the price of good in a country and subsequently affect the economy. Inflation rate is the most common element that affecting it. When the inflation rate in a country is relatively higher than foreign country, the purchasing power of the country will decrease and the country’s currency will depreciated. Besides, when the term of trade rises, meanings the export index prices higher than imports index prices, it is good for a country to boost their economic. However, if a country is in high inflation, government can intervene in foreign exchange market operation in order to stabilize the economy in short term but not in the long term as economic cannot be manipulated.