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Introductory Macroeconomics – NA1019
Chapter 9 – The Exchange Rate and the Balance of Payments

Catia Cialani-cci@du.se

Some questions to be answered…


The dollar, the yen, and the euro are three of the world’s monies. But they are among more than 100 different monies that circulate in the global economy. The dollar and the yen have been around for a long time. The euro was created in the 1990s. In October 2000, one U.S. dollar bought 1.17 euros. From 2000 through 2008, the dollar sank against the euro and by July 2008 one U.S. dollar bought only 0.63 euros. Why do currency exchange rates fluctuate? The U.S. economy has become attractive to foreign investors. What determines the amount of international borrowing and lending? dolar Euro neye göre artar azalır? neden?

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Foreign Exchange Market


To buy goods and services produced in another country we need money of that country. Foreign bank notes, coins, and bank deposits are called foreign currency. We get foreign currency in the foreign exchange market.





Foreign Exchange Market


The Foreign Exchange Market We get foreign currency and foreigners get U.S dollars in the foreign exchange market. The foreign exchange market is the market in which the currency of one country is exchanged for the currency of another.





Foreign Exchange Market


Exchange Rates The price at which one currency exchanges for another is called a foreign exchange rate. (example 84 yen per US dollar) A fall in the value of one currency in terms of another currency is called currency depreciation.







A rise in value of one currency in terms of another currency is called currency appreciation. 1 $ = 0.76 Euro 1 yil sonra 1$= 0.98 olursa. $'in degerini artiriyor. olusan dlagnalanmaya bakmak iyi olur

Foreign Exchange Market



   

Nominal and Real Exchange Rates The nominal exchange rate is the value of the U.S. dollar expressed in units of foreign currency per U.S. dollar. It is a measure of how much of one money exchanges for a unit of another currency. The real exchange rate is the relative price of foreignproduced goods and services. It is a measure of the quantity of real GDP of other countries that we get for a unit of U.S. real GDP. Given by RER= E (P / P*), where P* is the foreign price

Real vs. Nominal, an example from the book
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In our mind-lab, Japan only produces DVD players and the US only produce airplanes. Say the price of a DVD player is 10 000 yen. Say the price of an airplane is 100 000 000 $. Assume the nominal exchange rate is 100 yen per dollar At that nominal exchange rate a DVD player costs 100$. Then, we say that one airplane buys one million DVD players. This is the real exchange rate.

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The Foreign Exchange Market
An

Exchange Rate Is a Price

Like

all prices, an exchange rate is determined in a market—the foreign exchange market. The

U.S. dollar is demanded and supplied by thousands of traders every hour of every day. With

many traders and no restrictions, the foreign exchange market is a competitive market.

The Foreign Exchange Market


The Demand for One Money Is the Supply of Another Money






When people who are holding one money want to exchange it for U.S. dollars, they demand U.S. dollars and they supply that other country’s money. So the factors that influence the demand for U.S. dollars also influence the supply of Canadian dollars, E.U. euros, U.K. pounds, and Japanese yen. And the factors that influence the demand for another country’s money also influence the supply of U.S. dollars.

The Foreign Exchange Market


Demand in the Foreign Exchange Market


The quantity of U.S. dollars that traders plan to buy in the foreign exchange market during a given period depends on    

The exchange rate World demand for U.S. Exports

Interest rates in the United States and other countries
The expected...
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