Chapter 13 - Foreign exchange and the international trade of money. After completing this unit, you should be able to: Understand how foreign exchange markets operate, demonstrate how foreign exchange rates are determined, describe how foreign exchange rates influence international trade.
Trang 1Introduction to Economics: Social Issues and Economic Thinking
Wendy A Stock
PowerPoint Prepared by
Z Pan
Chapter 13
Foreign Exchange and the
International Trade of Money
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TOUTOUDAKI/iStockphoto
Trang 2Ø Understand how foreign exchange markets operate
Ø Demonstrate how foreign exchange rates are determined
Ø Describe how foreign exchange rates influence international trade
After studying this chapter, you should be
able to:
Trang 3Ø The Exchange Rate is the rate at which one
currency can be exchanged for another It is
usually stated in terms of how many units of one currency can be bought with one unit of a
different currency
e.g 1 USD = 0.71 EUR
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FOREIGN EXCHANGE MARKETS
Trang 4Ø The demand for Euros comes from people who need to exchange U.S dollars for Euros
e.g U.S importers of French wine or other products, U.S tourists, and U.S investors who want to invest in French companies
Ø The supply of Euros comes from people and
firms who want to buy U.S dollars
e.g French citizens or businesses want to purchase U.S goods and services or travel to the U.S.
The demand and supply of foreign currencies
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Foreign exchange market
Trang 6Foreign exchange market
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Changes in Demand and Supply
Trang 8Ø When the price of currency A rises relative to
currency B, currency A has appreciated
Ø When the price of currency A falls relative to
currency B, currency A has depreciated
Appreciation vs depreciation
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Changes in Demand and Supply
Trang 10Ø Tastes and Preferences : Changes in tastes and
preferences for a certain country’s goods and
services can change the demand for that country’s currency
Ø Income : Assuming that foreign goods and services are normal (rather than inferior) goods, increases in people ’s incomes in one country can increase their demand for foreign goods and services.
Factors shifting supply and demand
Trang 11Ø Expectations: People’s expectations about the future influence their demand for goods and
services today
Ø Interest Rates: If interest rate in Europe is higher than United States, lenders and investors will
increase lending and investing in Europe,
increasing demand for Euros
Ø Risk: If lending in Europe becomes more risky, lenders will decrease lending and investing
there, decreasing demand for Euros
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Factors shifting supply and demand
Trang 12Ø Exports: Goods or services produced
domestically but sold abroad
Ø Imports: Goods or services produced abroad but sold domestically
Ø Trade surplus: When a country ’s level of
exports exceeds its level of imports
Ø Trade deficit: When a country ’s level of imports exceeds its level of exports
international trade
Trang 13Ø Appreciation of U.S dollar relative to Euro will lead to a reduction in U.S exports to Europe
Ø Appreciation of U.S dollar against Euro
simultaneously involves a depreciation of Euro against U.S dollar
Ø Depreciation of Euro will lead to an increase in European exports to the U.S Ceteris paribus
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Value of Foreign currencies & international
trade
Trang 14Ø Depreciation of U.S dollar against Euro will lead
to an increase in U.S exports to Europe and a decrease in U.S imports from Europe
Ø Depreciation of U.S dollar against Euro
simultaneously involves an appreciation of Euro against U.S dollar
Ø Appreciation of Euro will lead to a decrease in European exports to the U.S
Value of Foreign currencies & international
trade
Trang 15Ø In Flexible or Floating Exchange Rate System , exchange rates are determined by demand and supply in the foreign exchange markets
Ø In Fixed or Pegged Exchange Rate System,
exchange rates are kept constant through
government action in foreign exchange markets
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FIXED AND FLEXIBLE EXCHANGE RATES
Trang 16fixed exchange rate system
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fixed exchange rate system?
an increase in the demand for Mexican Pesos relative to U.S dollars?
Trang 18Key Concepts
system