Chapter 5

Presentation 3Exchange Rates

Exchange Rate

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

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

FOREX Cont’d

• 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

The Foreign Exchange MarketExchange RatesDollar – Yen Market

P

QQuantity of yen

Do

llar

pri

ce o

f 1

yen

.01

Qe

Dy

Sy

Exchange Rate:$.01=¥1

G 5.1

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)

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

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)

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

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

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

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