EXCHANGE RATES

The price at which one currency can be exchanged/traded for another EXCHANGE RATE The price at which one currency can be exchanged/traded for another

1. Actors in the Foreign Exchange Market http://www.youtube.com/watch?v=-qvrRRTBYAk t______________________ g______________________ s______________________ i______________________ 2. Items affecting a currency rate: _________________________ law _______________interest rates _______________situation ______________indicators: ______ _________

Purchasing power parity (PPP) A rate of exchange calculated for two currencies so that the amount paid for a range of goods and services in both countries is the same

FOREIGN EXCHANGE RATES Necessary for foreign trade/economic transaction Determined by demand and supply (tourism, investment import/export trade in currencies)

A strong kuna is bad for exporters, good for importers the increased kuna > more expensive exports > fewer sales > fewer profits the strong kuna > cheaper import of foreign products > cheaper import of raw materials cheaper > the production costs lower > must reduce domestic prices > lower profits fewer exports more imports bad Balance of Payments

Demand – when we purchase foreign goods/services Supply – when we export Market forces move the rate up or down to balance the inflows and outflows of a currency

output/inflation/foreign trade governments try to regulate exchange rates affect output/inflation/foreign trade governments try to regulate exchange markets to improve foreign trade devaluation = decrease the value of a currency in a fixed system revaluation = increase the value of a currency in a fixed system appreciation = increase in value over a period of time depreciation = fall in the value over a period of time

Convertible currency = money of one country that can easily be changed into the money of another country, especially into a strong currency (the dollar, the euro, the pound, the yen)

Pegged currencies to peg = to fix against something (gold, another currency) soft currencies (kuna, pesos…) must be pegged to hard currencies

EXCHANGE RATE SYSTEMS 1. The gold standard 2. Freely floating exchange rates 3. Managed exchange rates

1. THE GOLD STANDARD the Bretton Woods agreement, 1944 fixed exchange rates defined in terms of gold and the US dollar currencies could only be adjusted by the IMF (devaluated/revaluated) abandoned in 1971 (not enough gold)

2. FLOATING EXCHANGE RATES determined by supply and demand reflect a country’s balance of payments and rate of inflation currency speculation, the value of currencies is constantly fluctuating on foreign exchange markets

3. MANAGED EXCHANGE RATES governments and central banks influence the level of their currencies when necessary governments buy or sell in order to increase or decrease the value of their currencies (use their foreign currency reserves)

COMMON CURRENCY (SINGLE CURRENCY) the euro – 2002 stable and certain economic environment

http://www.youtube.com/watch?v=itYnQzrTCgE&feature=related What is the Forex Market? http://www.youtube.com/watch?v=m_muYXqjNAk&feature=related What happens with changing economies? Give an example with the kuna and the euro. http://www.youtube.com/watch?v=RK-03L6XVWw&feature=related

Gold ________________ ended in the early 1970s. ADD APPROPRIATE WORDS TO THESE SENTENCES: revaluation, floating, managed, speculators, convertibility, peg, central Gold ________________ ended in the early 1970s. In fact we have ___________ floating exchange rates, because governments and __________banks sometimes intervene on currency markets. Another verb for fixing exchange rates against something else is to ________ them. Increasing the value of an otherwise fixed exchange rate is called ___________________. A currency can appreciate if lots _______________ buy it. In most western countries there is a system of ___________exchange rates determined by supply and demand.

Gold convertibility ended in the early 1970s. In fact we have managed floating exchange rates, because governments and central banks sometimes intervene on currency markets. Another verb for fixing exchange rates against something else is to peg them. Increasing the value of an otherwise fixed exchange rate is called revaluation. A currency can appreciate if lots speculators buy it. In most western countries there is a system of floating exchange rates determined by supply and demand.