Exchange Rates Currency Markets

Exchange Rates Exchange rates: is the price of one country’s currency in terms of another country’s currency. Determining exchange rates 1. Fixed exchange rate: an established price for a foreign currency that is tied to a stable currency of a developed country. 2. Floating (flexible) exchange rate: the forces of supply and demand establish the value of one country’s currency in terms of another country’s currency.

How are exchange rates expressed One countries currency is equal to ??? Units of another countries currency. Like this table: 1 USD/In USD$1 Argentine Peso Australian Dollar Bahraini Dinar

How are exchange rates expressed $1USD= 8.73 Argentine Pesos $1USD=1.28 Australian Dollar $1USD=.377 Bahraini Dinar Which currencies are stronger than the dollar and which are weaker? 1 USD/In USD$1 Argentine Peso Australian Dollar Bahraini Dinar

You can tell by: If $1USD gets you MORE THAN 1 unit of the other currency, they U.S. dollar is stronger. – I.E. $1USD= 8.73 Argentine pesos – And $1USD= 1.28 Australian Dollars IF $1USD gets you LESS THAN 1 unit of the other currency, they U.S. dollar is weaker $1USD=.377 Bahraini Dinar

What does “Strong” and “Weak” mean? Change in the exchange rates Strong= More Valuable Weak= Less valuable

How do you identify if a currency is gaining or losing it’s strength Change in the exchange rates 1. Currency appreciation: is the gain of value of a country’s currency with respect to one or more foreign currencies. A. Benefits consumers, but can hurt producers. 2. Currency Depreciation: When a nation’s currency loses value. A. Hurts consumers but benefits producers

How do exchange rates change? Supply and demand for currencies can change the value for currencies. Value Market for $USD

For international trade, we will focus on the DEMAND for a currency Exports and Imports can effect the demand for a currency When a country’s exports are desired, they want to be paid in their own currency. – For example: If you sold your phone to a person in Mexico, would you want them to pay you in pesos? – OF COURSE NOT!! YOU WANT $USD!!!

THIS TAKES PLACE ON THE FOREIGN CURRENCY EXCHANGE MARKET THE PESOS WILL BE TURNED INTO $$$$$$ – EXAMPLE: YOU SOLD YOUR PHONE TO A PERSON IN MEXICO FOR $100. If the exchange rate was $1 USD is equal to 10 PESOS or $1USD = 10 PESOS, how many PESOS would that $100 phone cost that person in Mexico? CAN YOU FIGURE IT OUT?

THIS IS HOW WE DO IT How? 10 PESOS/$ X 100 = 1,000 pesos. Answer: 1,000 pesos. Which CURRENCY is more valuable? – The United States dollar is more valuable. » It takes 10 pesos to equal only 1 dollar

When currency values change, your $100 phone could change in terms of Pesos LETS SEE WHAT HAPPENS IF THE MEXICAN PESO HAS GAINED VALUE – IF THERE WAS AN INCREASE IN DEMAND FOR THE PESO, THE PESO WOULD APPRECIATE IN VALUE VALUE MARKET FOR PESOS

CURRENCY APPRECIATION LETS SAY THAT THE NEW EXCHANGE RATE BECAUSE OF THIS NEW DEMAND FOR THE PESO HAS CHANGED THE EXCHANGE RATE FROM $1USD = 10 PESOS – TO: $1 = 5 PESOS – LETS SAY A PERSON IN MEXICO COULD BUY YOUR PHONE(WHICH WAS MADE IN USA) FOR $100 OR A PHONE MADE IN MEXICO FOR 1000 PESOS NOW HOW MUCH WOULD YOUR $100 PHONE COST IN PESOS? WHICH PHONE SHOULD THE PERSON IN MEXICO PURCHASE??????

BECAUSE OF APPRECIATION… $1USD = 5 PESOS YOU STILL WANT TO RECEIVE $100 RIGHT? YOUR PHONE DID COST 1,000 PESOS BUT NOW…….. PHONE= 5 PESOS X 100 = 500 PESOS!!!!! SO NOW THE PERSON IN MEXICO WOULD RATHER BUY YOUR PHONE FOR 500 PESOS RATHER THAN A PHONE MADE IN MEXICO FOR 1000 PESOS.

WHAT DOES THIS MEAN FOR PRODUCERS AND CONSUMERS? BENEFIT- – IN MEXICO, THE CONSUMERS BENEFIT BECAUSE THEY HAVE ACCESS TO CHEAPER PRODUCTS FROM THE U.S. RATHER BUY A 500 PESO PHONE THAN A 1000 PESO PHONE – IN THE U.S., PRODUCERS BENEFIT BECAUSE THEIR EXPORTS ARE CHEAPER FOR OTHER COUNTRIES TO BUY. YOU RECEIVE YOUR $100 EITHER WAY

WHAT DOES THIS MEAN FOR PRODUCERS AND CONSUMERS? WHO LOSES FROM THIS????? – IN MEXICO, THE PRODUCERS LOSE BECAUSE THEY HAVE TO COMPETE WITH CHEAPER AMERICAN IMPORTS AND MAY LOSE A SHARE OF THE MARKET – IN THE U.S. CONSUMERS WILL LOSE BECAUSE GOODS THEY USE TO PURCHASE FROM MEXICO WILL NOW BE MORE EXPENSIVE WHAT???!!!?? WAIT!! WHY ARE MEXICAN PRODUCTS NOW MORE EXPENSIVE?

WHY ARE MEXICAN GOODS NOW MORE EXPENSIVE IN THE U.S.? THE EXCHANGE RATE CHANGED – $1 WAS WORTH 10 PESOS – NOW $1 IS ONLY WORTH 5 PESOS SO LETS CHANGE THE PERSPECTIVE IF YOU WANTED TO BUY A BLANKET MADE IN MEXICO AND IT IS PRICED IN MEXICO AT 500 PESOS IF THE EXCHANGE RATE WAS $1USD=10 PESOS THE BLANKET WOULD COST $50 (500/10) BUT IF THE EXCHANGE RATE WAS $1USD=5 PESOS THE BLANKET WOULD COST $100 (500/5)

So what would happen if the US DOLLAR GAINED STRENGTH? LETS LOOK AT OUR ORGINAL EXCHANGE RATE OF $1USD = 10 PESOS AND CHANGE IT TO $1USD = 100 PESOS YOUR $100 PHONE WOULD NOW COST 10,000 PESOS IN MEXICO ($100 x 100= 10,000) BUT THE 500 PESO BLANKET MADE IN MEXICO WOULD NOW COST YOU $5 IN THE US. (500 PESOS/100= $5)

WHO IS BENEFITS AND WHO LOSES? IN THE U.S. – BENEFITS: CONSUMERS HAVE ACCESS TO CHEAPER GOODS – LOSES: PRODUCERS HAVE TO COMPETE WITH CHEAPER IMPORTS  IN MEXICO  BENEFITS: PRODUCERS CAN SELL THEIR PRODUCTS IN FOREIGN MARKETS EASIER  LOSES: CONSUMERS LOSE ACCESS TO CHEAPER PRODUCTS

HOW DO I DO CONVERSIONS? TRY TO US THE $1USD =? LIKE $1=2PESOS – If converting $USD to a foreign currency, multiply the amount in $USD TIMES EXCHANGE RATE MULTIPLY YOUR BAGS -If converting foreign currency to $USD, divide the amount of foreign currency by the EXCHANGE RATE DIVIDE YOUR LAUNDRY

TRY THESE ACTIVITY 18 EXCHANGE RATES

How are Exchange rates effected by imports and exports Trade Deficits(x-M) results in the $ losing value in foreign exchange markets A trade Surplus (X-m) WOULD result in the dollar appreciating in value or becoming stronger.