Exchange Rates

1
Chapter 5

• Presentation 3
• Exchange Rates

2
Exchange Rate

• The rate at which the currency of one country can
  be exchanged for the currency of another
• http//www.exchangerate.com/

3
FOREX Market

• FE, FX, Foreign Exchange
• Where from one nation is exchanged for of
  another
• Over 3.2 trillion exchanged daily
• Used to convert for imports/exports or for
  speculation
• 24 hour market in major financial hubs- New York,
  Tokyo, London, Franfort

4
FOREX Contd

• When Americans buy imports, they add dollars to
  the FOREX market (increase supply) and take
  foreign currency out of the market
• This depreciates the dollar since there are now
  more dollars supplied in the FOREX
• The demand for foreign currency goes up

5
The Foreign Exchange Market
Exchange Rates
Dollar Yen Market
P
Sy
Exchange Rate .011
.01
Dollar price of 1 yen
Dy
Qe
Q
Quantity of yen
6
Value of the Dollar

• Appreciation- the value of the dollar has
  increased and one can now buy more foreign goods
  (Imports rise, exports fall)
• Depreciation- the international value of the
  dollar has decreased and it takes more dollars to
  buy foreign goods (Imports fall, exports rise)

7
Dollar Price

• Dollar Price of Pounds is how many dollars it
  takes to buy one British Pound
• When the dollar price goes up (takes more dollars
  to buy 1 Pound), the dollar has depreciated and
  the international value of the dollar decreased

8
Trade Restrictions And Help

• 1. Tariffs- tax on imported goods
• 2. Import quotas- limit on imports
• 3. Non-tariff Barriers- difficult requirements
  and red tape
• 4. Export Subsidies- government lowers the
  production costs which helps to compete with
  rivals (ex- Airbus received funds from EU
  countries to compete with Boeing)

9
World Trade Organization (WTO)

• 149 nations as members
• The WTO oversees international trade agreement
  and rules on disputes between nations
• Pros- increased standard of living
• Cons- allows countries to avoid paying high
  domestic wages

10
Trade Bloc

• A group of countries having common identity,
  economic interests, and trade rules
• The nations lower or remove trade restrictions
  between members to allow free-trade

11
North American Free Trade Agreement (1993)

• A major trade bloc between US, Canada, and Mexico
• Free trade area between the 3 countries
• most critics feared that the agreement would
  allow the US to send jobs to Mexico for low wages
• Also would allow South Korea and others to put
  plants in Mexico and Canada

12
European Union (EU)

• Trade bloc of 25 European nations
• The Euro is the common currency used by 12
  members---GB, Sweden, Denmark all maintained
  their currency