Key Concepts Capital Investment –Building commercial facilities or purchasing assets for the purpose of expanding a business. Examples: manufacturing plants, new machinery, etc. Foreign Direct Investment –The purchase by foreign entities of existing business assets or the creation of new business assets in country. Examples: Buying a stake in a foreign company, expanding business operations to another country, etc. Supply and Demand (in the determination of exchange rates)

What affects the supply and demand of currencies? Various factors influence a country’s exchange rate. Such as: Exchange rate: the price of one nation’s currency in terms of another. Changes in preferences for foreign goods. Changes in prices in different countries. Changes in the interest rates in different countries. Changes in incomes in different countries. Speculation.

Simulation Roles Foreign Firms –Objective: Purchase yen so you can invest in capital in Japan –Objective: Make the highest ROI (Return on Investment) Bank of Japan –Objective: Sell your country’s currency to buyers.

Foreign Exchange Market FirmYenDollars = = = = = = = -The market in which global currencies are traded and exchange rates are determined by changes in supply and demand for those currencies.

And the 2020 Olympics Games go to…

Why are the Japanese so happy? International recognition Winning a tough bidding process Lasting legacy Increased tourism (500,000+ people visited London during the 2012 Olympics and the city benefited from increased infrastructure and venue investments.) Tokyo will now be the benefactor of hundreds of thousands of visitors in the coming year Investment in Japan will increase

Foreign Exchange Market FirmYenDollars = = = = = = = = = = = =

Simulation Debriefing What effect did the announcement of the Olympics have on your desire to invest in Japan? Why? –Increased because there was more potential for a return on the investment. How did the Olympics affect your demand for Japanese Yen? Why? –Increased, Japanese currency was needed to invest in Japan. As a result of this increased demand, what happened to the price of yen? –Increased. When demand for yen increase, the number of dollars needed to buy each yen increased.

Changes in Supply and Demand Changes in preferences for foreign goods. –Example: Americans want to buy more Japanese goods. Demand increases Yen appreciates

Changes in Supply and Demand Changes in price level in different countries. –Example: Inflation increases in the Europe and remains constant in the U.S. Demand increases Dollar appreciates asp.tosm.ttu.edu

Changes in Supply and Demand Changes in the interest rates in different countries. –Example: Interest rates rise in the U.S. and remain constant in China. Supply increases Yuan depreciates

Changes in Supply and Demand Changes in the interest rates in different countries. –Example: Interest rates rise in the U.S. and remain constant in China. Supply increases Yuan depreciates

Changes in Supply and Demand Changes in incomes in different countries. –Example: Real GDP per capita in the U.S. rises relative to Australia. Demand increases Australian dollar appreciates

Changes in Supply and Demand Speculation –Example: The IOC announces London as the host of the 2012 Olympic games. Demand increases British pound appreciates

Answers to Student Activity 1; st night = 2970 yuan (300/.101); 2 nd night = 3030 yuan (300/.099); of 60 yuan 2. The pound appreciated; the dollar depreciated 3. Basic answer – AFTER (808 vs. 802); –Advanced Answer – Buy pounds before and buy euros with the pounds during the Olympics; –$1000 before = 643 pounds = 817 Euros during the Olympics

Answers to Student Activity 1; Before. The yuan appreciated against the Euro after the Olympics began. 5. Before. 5,000 pounds = 67,505 Yuan (5000 * ). After the Olympics began, 5,000 pounds = 65,805 Yuan (5000 * ). 6. Before, because once the Olympics begin, it is more expensive to purchase Chinese Yuan, therefore countries are less likely to import from China.

Answers to Student Activity 1 7. China is much larger than the UK. China’s managed exchange rate tends to remain stable. 8. Buy currency before the games begin, but don’t expect major changes because there are many factors that go into exchange rates. 9. British travelers abroad, British companies/citizens importing goods, people with savings accounts in British Pounds, etc. 10. Foreign travelers in China, Chinese exporters trying to ship goods abroad, Chinese citizens holding foreign investments, etc.

Economic Impact of London Olympics