1. Bell Activity
How do you think your life would be different without foreign-made goods?

2. I will be able to…
Explain the difference between fixed exchange rates and flexible exchange rates.
Analyze the national and international effects of the strength of the dollar.

3. Foreign Exchange and Trade Deficits
Chapter 17
Section 3

4. Crash Course Economics

5. Financing International Trade
International trade is not possible without well- functioning foreign exchange markets.
Foreign exchange market
different currencies used to facilitate international trade- are bought and sold in the foreign exchange market.
includes banks that help secure foreign currencies for importers and banks that accept foreign currencies from exporters.
Foreign exchange rate- price of one country’s currency in terms of another country's currency.

6. What is a Foreign Exchange Market?
Bell Work
What is a Foreign Exchange Market?

7. Fixed Exchange Rates Fixed exchange rates
Values of currencies are fixed in relation to one another.
Stayed in effect until 1971
Popular when the world was on a gold standard.

8. Flexible Exchange Rates
System that relies on supply and demand to determine the value of one currency in terms of another.
In effect since 1971.
AKA floating exchange rates.
Whenever the dollar falls, exports tend to go up and imports go down.
Dollar rises, the reverse will occur.

9. Trade Deficits and Surpluses
Trade deficit - the value of the products a nation imports exceeds the value of the products it exports.
Trade surplus - the value of its exports exceeds the value of its imports.
Each is dependent on the international value of its currency.
Trade-weighted value of the dollar- index displaying the strength of the dollar against a group of major foreign currencies.
Index falls, dollar is weak in relation to other currencies.

10. Trade Deficits and Surpluses
Dollar is strong (1985 & 2002) foreign goods become less costly and American exports become more costly for the rest of the world.
Imports rise, exports fall, and trade deficits result.
Persistent trade imbalance can cause a chain reaction that affects income and employment.
Increase of dollars on world markets caused the dollar to lose value.
Makes imports more expensive for Americans.
Exports less expensive for foreigners.
Exports surge, employment and income is generated in the export- oriented industries.

11. Trade Deficits and Surpluses
Value of the dollar gets low enough, the process will reverse.
Foreigners will sell their currency to buy more American dollars.
Use American dollar to buy American products.
Drives dollar up, making more difficult for American export industries.
Better for import industries.
Under flexible exchange rates, trade deficits tend to correct themselves automatically through supply, demand, and the price system.

12. Trade Deficits and Surpluses
Weak currency tends to cause a trade surplus.
Eventually pulls up the value of the currency.
Because one sector of the economy is hurt while another is helped, there is no net gain in having either a strong or weak dollar.
United States and many other countries no longer design economic policies just to improve the strength of their currency on international markets.

13. Crash Course Economics

14. Reflection:
In your opinion, is a trade deficit a good thing, a bad thing, or neither? Explain your answer.

15. Activity
Complete activity on trade deficit.