1. Warm Up
What do exchange rates tell us?

2. Thursday, October 8, 2015
Objective: Students will be able to analyze the effects of exchange rates on trade.
Purpose: Most countries have their own currencies.

3. What are Exchange Rates?
Exchange rate: the value of a nation’s currency in relation to another nation’s currency
Example: $1 US Dollar =$ Mexican Pesos
Purpose: to allow you to convert prices in one currency to prices in another currency

4. Current Exchange Rates

5. When a Currency Changes Value
Appreciation of currency: an increase in the value of a currency
When a currency appreciates, it becomes “stronger”
Depreciation of currency: a decrease in the value of a currency
When a currency depreciates, it becomes “weaker”

6. Effect of Exchange Rates on Trade
Effects of Appreciating Currency
Effects of Depreciating Currency
Value of currency rises, making goods produced in that country more expensive
Exports: Costs of exports rises for foreign buyers, causing sales in other countries to decrease
Imports: Cost of imports falls, causing sales of imports to increase
Value of currency falls, making goods produced in that country less expensive
Exports: Cost of exports falls for foreign buyers, causing sales in other countries to increase
Imports: Cost of imports rises, causing sales of imports to decrease

7. Fixed Exchange Rate
A currency system in which governments try to keep the values of their currencies constant against one another.
In a typical fixed exchange-rate system, one country is the stable currency and the other countries try to “fix” or “peg” their exchange rates to the currency of this central country.
Exchange rates rely on supply and demand.
Was used when countries were on the gold standard

8. Flexible Exchange Rate System
the exchange rate is determined by supply and demand (demand is determined by the demand for products from a specific currency)
accounts for the day-to-day changes in currency values
most nations use this system to determine exchange rates