1. Exchange Rates and Agricultural Trade Chapter 17

2. Discussion Topics Exchange rates and the foreign exchange market Exchange rate determination Exchange rates and U.S. agricultural trade

3. Exchange Rate Defined Exchange rate: The no. of units of foreign currency (i.e., Mexican peso) required to obtain 1 unit of domestic currency (i.e. U.S. $) Reciprocal of this rate: No. of units of domestic currency required to obtain 1 unit of foreign currency  Value of domestic currency relative to foreign currency (i.e., value of the $ relative to the £ or ¥) Page 335

4. Page 337 When the value of the dollar appreciates in value, the exchange rate index increases A depreciation of the value of a dollar causes the index to decline Exchange Rate Defined

5. Page 337 Canadian dollar (per U.S. dollar) of 1.305 → 1.31 Canadian dollar exchanges for 1 U.S. dollar British Pound (in U.S. dollars) of 1.82 → a British pound exchanges for almost $1.82 in U.S. currency

6. Page 345 Only 25 countries, including the U.S., Japan and Canada allow their currencies to float independently  Determined by supply and demand for these currencies Most countries peg or “fix” their currency relative to another currency or basket of currencies Exchange Rate Determination

7. Page 348 Exchange Rate Determination Exchange Rate Demand for U.S. $ Supply of U.S. $ Foreign demand for U.S. $ neg. sloped  Lower exchange rate → cheaper for EU to import U.S. goods/services  ↑ demand for U.S. $ to pay for imports Supply of U.S. $ positively sloped  Higher exchange rate → Imports to U.S. relatively cheap  Convert $ to foreign currency, more $ available to market Euros/$ 1 2 3 4 5 20 104030 50 Quantity of $ Traded (Mil./Day)

8. Page 352 Scenario U.S. Wheat Price ($/ton) Exchange Rate (Yen/$) International Wheat Price (Yen/ton) Base10012012,000 Case 111012013,200 Case 210013213,200 An increase in the value of the dollar (relative to the Yen) makes U.S. exports more expensive Exchange Rate Impacts

9. Page 348 Exchange Rate Determination Interest rate differentials across countries are a major factor affecting demand for currency ↑ in U.S. interest rates relative to other countries  Foreign investors would transfer funds to the U.S. to generate higher returns → ↑ in demand for U.S. $

10. Page 348 Exchange Rate Determination Exchange Rate U.S. $ Demand Supply of U.S. $ Euros/$ 1.1 1.2 1.3 1.4 1.5 20 104030 50 Quantity of $ Traded (Mil./Day) An ↑ in demand for U.S. $ as U.S. interest rates ↑  Exchange rate goes from 1.30 to 1.433 Euros/$ U.S. $ Demand w/ ↑ in IR

11. Page 348 Exchange Rate Determination Balance of Trade has an impact on exchange rates U.S. trade deficit (U.S. imports > U.S. exports) → exchange rate ↓  U.S. exports become relatively cheap for other countries  U.S. imports of other countries goods become more expensive  U.S. exports will ↑ & U.S. imports will ↓  →Approach balanced trade levels

12. Page 348 Exchange Rate Determination Exchange Rate U.S. $ Demand Supply of U.S. $ Euros/$ 1 2 3 4 5 20 104030 50 Quantity of $ Traded (Mil./Day) Supply of U.S. $ resulting from trade deficit Trade deficit → an ↑ in supply of U.S. $ on currency markets  → weakening of the U.S. $  →↓ in exchange rate from 3 to 2 Euros/$

13. Page 351 Exchange rate ↑→ exports tend to ↓ Exchange rate ↓→ exports tend to ↑

14. Summary Exchange rates have an impact on U.S. agricultural trade The value of foreign currencies is determined in the foreign exchange market. Exchange rates have a significant impact on our trade balance

15. Chapter 18 discusses the reasons why nations trade….