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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.
Introduction to Economics: Social Issues and Economic Thinking Wendy A Stock Chapter 13 Foreign Exchange and the International Trade of Money Copyright © 2013 John Wiley & Sons, Inc / Photo Credit: ©MARIA TOUTOUDAKI/iStockphoto PowerPoint Prepared by Z Pan After studying this chapter, you should be able to: Ø Understand how foreign exchange markets operate Ø Demonstrate how foreign exchange rates are determined Ø Describe how foreign exchange rates influence international trade Copyright © 2013 John Wiley & Sons, Inc FOREIGN EXCHANGE MARKETS Ø 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 USD = 0.71 EUR Copyright © 2013 John Wiley The demand and supply of foreign currencies Ø 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 Copyright © 2013 John Wiley Foreign exchange market Copyright © 2013 John Wiley Foreign exchange market Copyright © 2013 John Wiley Changes in Demand and Supply Copyright © 2013 John Wiley Appreciation vs depreciation Ø Ø When the price of currency A rises relative to currency B, currency A has appreciated When the price of currency A falls relative to currency B, currency A has depreciated Copyright © 2013 John Wiley Changes in Demand and Supply Copyright © 2013 John Wiley Factors shifting supply and demand Ø Ø 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 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 Copyright © 2013 John Wiley 10 Factors shifting supply and demand Ø Ø Ø Expectations: People’s expectations about the future influence their demand for goods and services today 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 Risk: If lending in Europe becomes more risky, lenders will decrease lending and investing there, decreasing demand for Euros Copyright © 2013 John Wiley 11 international trade Ø Ø Ø Ø Exports: Goods or services produced domestically but sold abroad Imports: Goods or services produced abroad but sold domestically Trade surplus: When a country ’s level of exports exceeds its level of imports Trade deficit: When a country ’s level of imports exceeds its level of exports Copyright © 2013 John Wiley 12 Value of Foreign currencies & international trade Ø Appreciation of U.S dollar relative to Euro will lead to a reduction in U.S exports to Europe Ø Ø Appreciation of U.S dollar against Euro simultaneously involves a depreciation of Euro against U.S dollar Depreciation of Euro will lead to an increase in European exports to the U.S Ceteris paribus Copyright © 2013 John Wiley 13 Value of Foreign currencies & international trade Ø 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 Ø Depreciation of U.S dollar against Euro simultaneously involves an appreciation of Euro against U.S dollar Appreciation of Euro will lead to a decrease in European exports to the U.S Copyright © 2013 John Wiley 14 FIXED AND FLEXIBLE EXCHANGE RATES Ø Ø In Flexible or Floating Exchange Rate System , exchange rates are determined by demand and supply in the foreign exchange markets In Fixed or Pegged Exchange Rate System, exchange rates are kept constant through government action in foreign exchange markets Copyright © 2013 John Wiley 15 fixed exchange rate system Copyright © 2013 John Wiley 16 Questions/Discussions What are the costs and benefits having a fixed exchange rate system? What are some factors that would cause an increase in the demand for Mexican Pesos relative to U.S dollars? Copyright © 2013 John Wiley 17 Key Concepts • • • • • • • • • Exchange rate Appreciated Depreciated Exports Imports Trade surplus Trade deficit Flexible or floating exchange rate system Fixed or pegged exchange rate system Copyright © 2013 John Wiley 18 ... depreciated Copyright © 2 013 John Wiley Changes in Demand and Supply Copyright © 2 013 John Wiley Factors shifting supply and demand Ø Ø Tastes and Preferences: Changes in tastes and preferences for... goods and services or travel to the U.S Copyright © 2 013 John Wiley Foreign exchange market Copyright © 2 013 John Wiley Foreign exchange market Copyright © 2 013 John Wiley Changes in Demand and. .. 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