The FOREX market When we trade goods and services internationally we need to use the currency of the country that we are importing from or exporting to. The Exchange rate is the price of one currency in terms of another The currencies of the world are traded in Foreign exchange markets (FOREX Markets).

The Demand for $NZD The determinants of Demand for the NZ$ are: Amount of exports sold Number of tourists coming to NZ Amount of investment in NZ by overseas investors Income that NZers have earned from overseas investments returning to NZ.

The Supply of the $NZD The determinants of Supply for the NZ$ are: The amount of imported goods and services NZ tourists travelling overseas NZers investing in overseas businesses Repaying overseas loans

The FOREX market SNZ$ DNZ$ Q NZ$:US$ $0.77

Appreciation: An increase in the value of the currency in terms of the US$ i.e. going from $1 = 0.77US$ to $1 = 0.81US$ is called an APPRECIATION of the currency. This happens if there has been an increase in the demand for the currency (shifting the demand curve to the right) or a decrease in the supply of the NZ$ shifting the supply curve to the left.

Causes: Demand An increase in demand for the NZ$ could be caused by an increase in the number of Tourists to NZ to see where the Lord of the Rings was filmed. An increase in demand for the NZ$ could be caused by an increase in the number of investments in NZ. An increase in demand for the NZ$ could be caused by an increase in the number of Exports sold overseas.

Causes: Supply A decrease in the supply of the NZ$ could be caused by less NZers travelling overseas. A decrease in the supply of the NZ$ could be caused by a decrease in the amount of NZers investing overseas. A decrease in the supply of the NZ$ could be caused by a decrease in the amount of repayments of loans to overseas countries.

Depreciation A decrease in the value of the currency in terms of the US$ i.e. going from $1 = 0.77US$ to $1 = 0.65US$ is called a DEPRECIATION of the currency. This happens if there has been an decrease in the demand for the currency (shifting the demand curve to the left) or an increase in the supply of the NZ$ shifting the supply curve to the right.

Causes: Demand A decrease in demand for the NZ$ could be caused by a decrease in the number of Tourists to NZ as a result of bad publicity about travel to NZ. A decrease in demand for the NZ$ could be caused by a decrease in the number of investments in NZ by overseas firms. A decrease in demand for the NZ$ could be caused by a decrease in the number of Exports sold overseas.

Causes: Supply An increase in the supply of the NZ$ could be caused by more NZers travelling overseas. An increase in the supply of the NZ$ could be caused by an increase in the amount of NZers investing overseas. An increase in the supply of the NZ$ could be caused by an increase in the amount of repayments of loans to overseas countries

Draw graphs to illustrate the following: 1.Fewer tourists travel to Fiji as a result of the instability in the country.. 2.There is a rise in the demand by overseas buyers for NZ made boats as a result of the Americas cup 3.As a result of more Terrorism in the Middle East the price of Oil has risen 4.Fisher and Paykel decides to increase its investment in the United States 5.NZ sends more foreign aid to Darfur 6.NZ exports more to the UK as a result of a ‘Mad Cow’ disease outbreak 7.Exports to China decrease as a result of a political dispute between NZ and China over environmental issues

Exchange Rate Exercises: 1a. If the ER was $1 NZ to $0.55 US and the world price of Lamb is $US 10 per lamb then the revenue earned from the sale of a lamb in $NZ would be: 1b. If the exchange rate then depreciated to $1 NZ to $0.25 US the revenue would be 2a. If the world price of oil was $US 20 a barrel, the price of Oil in $NZ if the exchange rate was $1 NZ to $0.55 US Would be: 2b. If the ER was to depreciate to $1 NZ to $0.25 US the price of a $20 Barrel of oil in NZ$ would be