Slide 1

Ch. 50: Exchange rates and their determination

Slide 2

What is an exchange rate? Try to define it? = the price of one currency in terms of another Give some examples e.g. US$1 = 30 Thai baht * try getting started & * see examples P231 * do Q1

Slide 3

How are exchange rates determined? Exchange rates are determined by the supply and demand for them in the foreign exchange market (forex market): the markets where foreign currencies can be bought and sold http://www.youtube.com/watch?v=xwtgByffoUw *Copy Fig 50.1, P.231 appreciation = value of a currency Eg. US$1 = 30THB US$1 = 25THB the THB has appreciated as we now need less to buy 1 US$ depreciation = value of a currency in the example above the US$ depreciated as we now can buy less THB for US$1

Slide 4

Factors affecting the demand for a currency *Brainstorm The demand for exports (including tourism): exports demand for the exporters currency as G&S must be paid for in exporters currency exchange rate Eg. UK buys Thai rice. UK importers must pay the Thai exporters in Thai baht. Therefore they must buy (demand) Thai baht on the foreign exchange market. This will strengthen ( value) of the Thai baht. (* sketch Fig. 50.3) FDI demand for the countrys (receiving FDI) currency exchange rate Interest rates: high i/r in a country will attract investment form overseas demand & exchange rate in the country with high i/r

Slide 5

Factors affecting the supply for a currency * Brainstorm Demand for imports: imports supply of the importing countrys currency as G&S must be paid by exchanging importers currency exporters currency exchange rate (* sketch Fig. 50.4) Outward FDI Interest rates in other countries

Slide 6

Draw sketch graphs to show the effect on the GBP() of the following (Assume initial 1 = 1.5 US$); 1. increase in tourism to UK 2. US interest rates increase 3. UK government gives tax cuts for foreign firms investing in the UK 4. US jeans become more popular in the UK

Slide 7

Speculators are firms, individuals or financial institutions that buy & sell currencies for profit (similar to gambling, but more scientific). They buy currencies which they think will and sell those who they think will . They affect the supply/ demand of currencies thereby affecting the exchange rates. *exam practice