Exchange rates

Definition of exchange rates The price one currency in terms of another currency. The price one currency in terms of another currency. Calculates how much foreign currency we can buy with $1 of NZ currency Calculates how much foreign currency we can buy with $1 of NZ currency For example 1NZ$ is worth 50USc. For example 1NZ$ is worth 50USc.

Appreciation of the NZ$ Appreciation means the value of a currency has risen Appreciation means the value of a currency has risen Before appreciation 1NZ$ is worth 60USc Before appreciation 1NZ$ is worth 60USc Before appreciation 1NZ$worth60USc

Appreciation of the NZ$ Appreciation means the value of a currency has risen Appreciation means the value of a currency has risen Before appreciation 1NZ$ is worth 60USc Before appreciation 1NZ$ is worth 60USc After appreciation 1NZ$ is worth 75USc After appreciation 1NZ$ is worth 75USc Before appreciation 1NZ$worth60USc After appreciation 1NZ$worth75USc

Effect on imports If our currency appreciates (is worth more) we dont need as much of it to pay for things we buy overseas. If our currency appreciates (is worth more) we dont need as much of it to pay for things we buy overseas. This makes imports cheaper and we can afford to increase the amount we import. This makes imports cheaper and we can afford to increase the amount we import. Price Oil (US$) NZ / US exchange rate Price we pay NZ$ 100 1NZ$ worth 50USc 200

Effect on imports Price Oil (US$) NZ / US exchange rate Price we pay NZ$ 100 1NZ$ worth 50USc NZ$ worth 1US$ 100 If our currency appreciates (is worth more) we dont need as much of it to pay for things we buy overseas. If our currency appreciates (is worth more) we dont need as much of it to pay for things we buy overseas. This makes imports cheaper and we can afford to increase the amount we import. This makes imports cheaper and we can afford to increase the amount we import.

Price Oil (US$) NZ / US exchange rate Price we pay NZ$ 100 1NZ$ worth 50USc In other words 2NZ$ worth 1US$ NZ$ worth 1US$ 100 1NZ$ worth 50USc basically means it will take 2NZ$ to buy 1US$. This means we double the US price to work out what we pay 1NZ$ worth 50USc basically means it will take 2NZ$ to buy 1US$. This means we double the US price to work out what we pay 1NZ$ worth 1US$ basically means we pay the same as the US price 1NZ$ worth 1US$ basically means we pay the same as the US price

If our currency appreciates (is worth more) then it takes more foreign currency to buy our currency making our exports more expensive. If our currency appreciates (is worth more) then it takes more foreign currency to buy our currency making our exports more expensive. So foreigners look for cheaper goods from other countries and buy less of our exports. So foreigners look for cheaper goods from other countries and buy less of our exports. Price Milk (NZ$) NZ / US exchange rate Price they pay US$ 10 1NZ$ worth 50USc 5 Effect on exports

If our currency appreciates (is worth more) then it takes more foreign currency to buy our currency making our exports more expensive. If our currency appreciates (is worth more) then it takes more foreign currency to buy our currency making our exports more expensive. So foreigners look for cheaper goods from other countries and buy less of our exports. So foreigners look for cheaper goods from other countries and buy less of our exports. Price Milk (NZ$) NZ / US exchange rate Price they pay US$ 10 1NZ$ worth 50USc NZ$ worth 1US$ 10 Effect on exports

Price milk (NZ$) NZ / US exchange rate Price US pays US$ 10 1NZ$ worth 50USc In other words 1US$ worth 2NZ$ NZ$ worth 1US$ 10 1NZ$ worth 50USc for an American means 1US$ worth 2NZ$. This means they get things for half the NZ price. 1NZ$ worth 50USc for an American means 1US$ worth 2NZ$. This means they get things for half the NZ price. 1NZ$ worth 1US$ basically means they pay the same as the NZ price 1NZ$ worth 1US$ basically means they pay the same as the NZ price

Summary so far Appreciation of the NZ$ means… Our dollar is worth more! Our dollar can buy more foreign dollars Our dollar can buy more foreign dollars It costs us less to buy imports It costs us less to buy imports We will import more We will import more Foreign dollars cant buy as many NZ$ Foreign dollars cant buy as many NZ$ It costs foreigners more to buy our exports It costs foreigners more to buy our exports We will export less We will export less

Therefore… Depreciation of the NZ$ means… Our dollar is worth less! Our dollar can buy less foreign dollars Our dollar can buy less foreign dollars It costs us more to buy imports It costs us more to buy imports We will import less We will import less Foreign dollars can buy more NZ$ Foreign dollars can buy more NZ$ It costs foreigners less to buy our exports It costs foreigners less to buy our exports We will export more We will export more

Imported goods become cheaper and this reduces pressure on prices and inflation Local firms may lose customers if they can not lower their prices Exporters try to lower costs to keep their prices down. Other effects of appreciation

More Kiwis travel overseas as our dollar buys more but less foreign tourists come here as their dollar buys less. More Kiwis invest overseas as our dollar buys more and less foreigners invest here. NZ firms earning profit overseas dont get as much because the foreign currency is not worth as much.

Final summary Appreciation Less exports Less exports More imports More imports Less inflation Less inflation Less arriving tourists Less arriving tourists More Kiwis travelling More Kiwis travelling Less foreign investment in NZ Less foreign investment in NZ More NZ investment overseas More NZ investment overseas Lower returns for NZ firms earning profit overseas Lower returns for NZ firms earning profit overseas Depreciation More exports Less imports More inflation More arriving tourists Less Kiwis travelling More foreign investment in NZ Less NZ investment overseas Higher returns for NZ firms earning a profit overseas.