Section 3: International Economics 3.2 Exchange Rates.

Slides:



Advertisements
Similar presentations
Objectives Explain how ER is determined in floating ER system. Reasons causing fall in ER – depreciation Reasons causing rise in ER - appreciation.
Advertisements

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra,
Session 8 Exchange Rates Disclaimer: The views expressed are those of the presenters and do not necessarily reflect those of the Federal Reserve Bank of.
A Macroeconomic Theory of the Open Economy
MACROECONOMICS 2009 FRQ Norman.
Please read this to yourself. Ever been out of the country? Ever bought something from another country? When you bought goods/services in that foreign.
First Picture The Production Possibilities Frontier Tradeoffs in Pictures Quantity of Computers Produced Quantity of Cars Produced 3,000 1,000 2,000 2,200.
Factors influencing exchange rates: Supply and Demand for a Currency
Chapter 13 Exchange Rates and the Foreign Exchange Market: An Asset Approach November 2009.
International Trade and Foreign Exchange Markets
International Trade Mechanics of Foreign Exchange (FOREX)
 Exchange Rates. Exchange rates  The exchange rate refers to the rate at which national currencies can be exchanged for each other in the foreign exchange.
Lesson 14 – Money around the world
Exchange Rates  Any transaction that appears in the balance-of- payments accounts involves trading Canadian dollars for another currency  Transactions.
1 Welcome to Econ 414 International Economics Study Guide Week Thirteen.
38 The Balance of Payments, Exchange Rates, and Trade Deficits McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Ch. 50: Exchange rates and their determination. What is an exchange rate? Try to define it? = the price of one currency in terms of another Give some.
Foreign Exchange Rates Flexible Exchange Rates Uses demand and supply to determine the value of one nation’s currency compared to another nation’s Equilibrium.
MECHANICS OF FOREIGN EXCHANGE (FOREX). FOREIGN EXCHANGE (FOREX) The buying and selling of currency Ex. In order to purchase souvenirs in France, it is.
The Role of Exchange Rate Chapter  Currencies are traded in the foreign exchange market.  The prices at which currencies trade are known as exchange.
The Determination of Exchange Rates. Part I. Equilibrium Exchange Rates I. SETTING THE EQUILIBRIUM A. The exchange rate is the price of one unit of foreign.
Exchange Rate Determination. Meaning of Exchange Rate and Measuring Changes in Exchange Rates  Value of one currency in units of another currency  A.
International Economics Floating Exchange Rates and Internal Balance
Unit 5-2 Foreign Exchange (aka. FOREX)
Copyright © 2006 Thomson Learning 32 A Macroeconomic Theory of the Open Economy.
1 ECON Designed by Amy McGuire, B-books, Ltd. McEachern CHAPTER International Finance Macro.
Unit-5 Macro Review Foreign Exchange & Balance of Payments.
Exchange Rate To be able to identify weak and strong currencies To understand the impact of a currencies strength on its balance of trade.
Foreign Exchange (FOREX) The buying and selling of currency – Ex. In order to purchase souvenirs in France, it is first necessary for Americans to sell.
Unit 5, Lesson 13 Currency Exchange AOF Business Economics Copyright © 2008–2011 National Academy Foundation. All rights reserved.
Session 23 Internal and External Balance with Fixed Exchange Rates.
International Trade and Foreign Exchange Markets
Copyright ©2001, South-Western College Publishing Contemporary Economics: An Applications Approach By Robert J. Carbaugh 1st Edition Chapter 17: International.
International Trade Mechanics of Foreign Exchange (FOREX)
EXCHANGE RATE DETERMINATION. Meaning of Exchange Rate and Measuring Changes in Exchange Rates Value of one currency in units of another currency A decline.
EXCHANGE RATES. The Exchange Rate Exchange Rate: the value of one nation’s currency in relation to another is determined by the market forces of supply.
Exchange Rates. Georgia Council on Economic Education w w w. g c e e. o r g.
A Macroeconomic Theory of the Open Economy Chapter 14.
Copyright © 2010 Cengage Learning 32 A Macroeconomic Theory of the Open Economy.
What are exchange rates? An exchange rate is the price of one countries currency in relation to that of another. e.g. £1 = $1.6
ECO Global Macroeconomics TAGGERT J. BROOKS.
ECONOMICS: Principles and Applications 3e HALL & LIEBERMAN © 2005 Thomson Business and Professional Publishing Exchange Rates and Macroeconomic Policy.
The International Monetary System: Order or Disorder? 19.
Supply and Demand: Changes in Equilibrium. Change in Market Equilibrium: Change in Demand Price of caviar (per pound) Quantity of caviar (millions of.
1. Assume that the U.S. economy is in a severe
Norman 1. Assume that the U.S economy is in long-run equilibrium with an expected inflation rate of 6% and an unemployment rate of 5%. The nominal interest.
Exchange rate policy 1  Fixed and floating exchange rates  Alternatives to foreign exchange intervention  Monetary policy and  floating exchange rates.
Market for foreign exchange 1  Introduction  Nominal exchange rate  Real exchange rate  Trade and the real exchange rate.
Graphing Currency Movements
Balance of Payments Current Account (NX) –Export-Import & Investment Income Capital Account –Foreign purchase of US assets – U.S. purchase of foreign assets.
AP Macroeconomics Mechanics of Foreign Exchange (FOREX) &list=PL04578C46EDAB7734.
Exchange Rates The value of one country’s currency in terms of another country’s currency.The value of one country’s currency in terms of another country’s.
1 Objective – Students will be able to answer questions regarding foreign exchange. SECTION 1 Chapter 38- Foreign Exchange © 2001 by Prentice Hall, Inc.
Foreign Exchange (FOREX) The buying and selling of currency – Ex. In order to purchase souvenirs in France, it is first necessary for Americans to sell.
1. The Starting Point Assume the U.S. economy is operating at a level above potential output. Draw a correctly labeled graph...
Exchange Rate Equilibrium Demand for a currency  Quantity demanded increases as price of currency decreases Supply of a currency for sale  Quantity supplied.
Chapter A Macroeconomic Theory of the Open Economy 19.
Exchange Rate Determination International Finance (B 645)
INTERNATIONAL FINANCE Exchange Rate Determination 1.
Exchange Rate Determination International Business (MB 40)
A Macroeconomic Theory of the Open Economy Chapter 30.
Trade Surplus Trade Deficit Foreign Exchange Markets.
Chapter 32 Open Economies An open economy is one that interacts _________ with other economies around the world.
Foreign Exchange Markets, ECO Money & Banking - Dr. D. Foster Purchasing Power Parity, and Real Interest Parity.
Copyright ©2003, South-Western College Publishing Contemporary Economics: An Applications Approach By Robert J. Carbaugh 2nd Edition Chapter 17: International.
AP Macroeconomics Mechanics of Foreign Exchange (FOREX)
AS Economics PowerPoint Briefings 2007 tutor2u ™ tutor2u ™ Exchange Rates.
Exchange Rates The rate at which one currency can be exchanged for another e.g. £1 = $1.90 £1 = €1.50 Important in trade.
International Economics
Mechanics of Foreign Exchange (FOREX)
Presentation transcript:

Section 3: International Economics 3.2 Exchange Rates

Exchange rates – diagram labelling and terminology Q 0 S D Price of rupees in US$ Market for rupees US$ per rupee Equilibrium of demand and supply gives us the exchange rate. Equilibrium ↑, appreciation Equilibrium ↓, depreciation e q

Exchange rates – Demand for exports Q 0 S D Market for rupees e q D1D1 e1e1 q1q1 Buying exports = buying the currency Buying more exports = increase in demand = appreciation Buying fewer exports = decrease in demand = depreciation D2D2 e2e2 q2q2 US$ per rupee

Exchange rates – Demand for imports Q 0 S D Price of rupees in US$ Market for rupees e q e1e1 q1q1 Buying imports = selling the currency Buying more imports = increase in supply = depreciation Buying fewer imports = decrease in supply = depreciation e2e2 q2q2 S1S1 S2S2

Exchange rates – Relative interest rates Q 0 S D Market for rupees e q e1e1 q1q1 The higher the interest rate, the more people will want to invest in the country. Increase in local interest rate = increase in demand = appreciation Increase in o/s interest rates = increase in supply = depreciation e2e2 q2q2 S1S1 D1D1 US$ per rupee

Exchange rates – Relative inflation rates Q 0 S D Price of rupees in US$ Market for rupees e q e1e1 q1q1 The higher the inflation rate, the less attractive your exports are. Increase in local inflation rate = decrease in demand = depreciation Increase in local inflation rate = increase in supply = depreciation e2e2 q2q2 S1S1 D1D1

Exchange rates – Foreign investment in firms Q 0 S D Market for rupees e q e1e1 q1q1 Foreign investment can be in the form of foreign direct investment or portfolio investment Increase in foreign investment in local firms = increase in demand = appreciation Decrease in foreign investment in local firms = increase in supply = depreciation e2e2 q2q2 S1S1 D1D1 US$ per rupee

Exchange rates – Speculation Q 0 S D Price of rupees in US$ Market for rupees e q e1e1 q1q1 Investors buying and selling currencies to make profit People think currency will appreciate = increase in demand = appreciation People think currency will depreciate = increase in supply = depreciation e2e2 q2q2 S1S1 D1D1