Exchange Rates

Currency Markets

Exchange RatesExchange rates: is the price of one country’s currency in terms of

another country’s currency.

Determining exchange rates1. Fixed exchange rate: an established price for a foreign currency that is tied to a stable currency of a developed country.2. Floating (flexible) exchange rate: the forces of supply and demand establish the value of one country’s currency in terms of another country’s currency.

How are exchange rates expressed

• One countries currency is equal to ??? Units of another countries currency.Like this table:

1 USD/In USD $1Argentine Peso 8.726561Australian Dollar 1.277665Bahraini Dinar 0.376999

How are exchange rates expressed

• $1USD= 8.73 Argentine Pesos• $1USD=1.28 Australian Dollar• $1USD=.377 Bahraini Dinar

Which currencies are stronger than the dollar and which are weaker?

1 USD/In USD $1Argentine Peso 8.726561Australian Dollar 1.277665Bahraini Dinar 0.376999

You can tell by:

• If $1USD gets you MORE THAN 1 unit of the other currency, they U.S. dollar is stronger.– I.E. $1USD= 8.73 Argentine pesos– And $1USD= 1.28 Australian Dollars

• IF $1USD gets you LESS THAN 1 unit of the other currency, they U.S. dollar is weaker• $1USD= .377 Bahraini Dinar

What does “Strong” and “Weak” mean?

Change in the exchange rates

Strong= More ValuableWeak= Less valuable

How do you identify if a currency is gaining or losing it’s strength

Change in the exchange rates1. Currency appreciation: is the gain of value of a country’s currency with respect

to one or more foreign currencies.A. Benefits consumers, but can hurt

producers.

2. Currency Depreciation: When a nation’s currency loses value.

A. Hurts consumers but benefits producers

How do exchange rates change?

• Supply and demand for currencies can change the value for currencies.

Value

Market for $USD

For international trade, we will focus on the DEMAND for a currency

• Exports and Imports can effect the demand for a currency

• When a country’s exports are desired, they want to be paid in their own currency.– For example: If you sold your phone to a person in

Mexico, would you want them to pay you in pesos?

– OF COURSE NOT!! YOU WANT $USD!!!

THIS TAKES PLACE ON THE FOREIGN CURRENCY EXCHANGE MARKET

• THE PESOS WILL BE TURNED INTO $$$$$$– EXAMPLE: YOU SOLD YOUR PHONE TO A PERSON IN

MEXICO FOR $100.• If the exchange rate was $1 USD is equal to 10 PESOS or

$1USD = 10 PESOS, how many PESOS would that $100 phone cost that person in Mexico?

•CAN YOU FIGURE IT OUT?

THIS IS HOW WE DO IT

How? 10 PESOS/$ X 100 = 1,000 pesos.Answer: 1,000 pesos. Which CURRENCY is more valuable?–The United States dollar is more valuable.» It takes 10 pesos to equal only 1 dollar

When currency values change, your $100 phone could change in terms of Pesos

• LETS SEE WHAT HAPPENS IF THE MEXICAN PESO HAS GAINED VALUE– IF THERE WAS AN INCREASE IN DEMAND FOR THE

PESO, THE PESO WOULD APPRECIATE IN VALUE

VALUE

MARKET FOR PESOS

CURRENCY APPRECIATION

• LETS SAY THAT THE NEW EXCHANGE RATE BECAUSE OF THIS NEW DEMAND FOR THE PESO HAS CHANGED THE EXCHANGE

RATE FROM $1USD = 10 PESOS–TO: $1 = 5 PESOS– LETS SAY A PERSON IN MEXICO COULD BUY YOUR

PHONE(WHICH WAS MADE IN USA) FOR $100 OR A PHONE MADE IN MEXICO FOR 1000 PESOS

• NOW HOW MUCH WOULD YOUR $100 PHONE COST IN PESOS?•WHICH PHONE SHOULD THE PERSON IN

MEXICO PURCHASE??????

BECAUSE OF APPRECIATION…

• $1USD = 5 PESOSYOU STILL WANT TO RECEIVE $100 RIGHT?YOUR PHONE DID COST 1,000 PESOS

BUT NOW……..

PHONE= 5 PESOS X 100 = 500 PESOS!!!!!SO NOW THE PERSON IN MEXICO WOULD RATHER BUY YOUR PHONE FOR 500 PESOS RATHER THAN A PHONE MADE IN MEXICO FOR 1000 PESOS.

WHAT DOES THIS MEAN FOR PRODUCERS AND CONSUMERS?

• BENEFIT-– IN MEXICO, THE CONSUMERS BENEFIT BECAUSE

THEY HAVE ACCESS TO CHEAPER PRODUCTS FROM THE U.S. RATHER BUY A 500 PESO PHONE THAN A 1000 PESO PHONE

– IN THE U.S., PRODUCERS BENEFIT BECAUSE THEIR EXPORTS ARE CHEAPER FOR OTHER COUNTRIES TO BUY. YOU RECEIVE YOUR $100 EITHER WAY

WHAT DOES THIS MEAN FOR PRODUCERS AND CONSUMERS?

• WHO LOSES FROM THIS?????– IN MEXICO, THE PRODUCERS LOSE BECAUSE THEY

HAVE TO COMPETE WITH CHEAPER AMERICAN IMPORTS AND MAY LOSE A SHARE OF THE MARKET

– IN THE U.S. CONSUMERS WILL LOSE BECAUSE GOODS THEY USE TO PURCHASE FROM MEXICO WILL NOW BE MORE EXPENSIVE • WHAT???!!!?? WAIT!! WHY ARE MEXICAN PRODUCTS

NOW MORE EXPENSIVE?

WHY ARE MEXICAN GOODS NOW MORE EXPENSIVE IN THE U.S.?

• THE EXCHANGE RATE CHANGED– $1 WAS WORTH 10 PESOS– NOW $1 IS ONLY WORTH 5 PESOS• SO LETS CHANGE THE PERSPECTIVEIF YOU WANTED TO BUY A BLANKET MADE IN MEXICO AND IT IS PRICED IN MEXICO AT 500 PESOSIF THE EXCHANGE RATE WAS $1USD=10 PESOS

THE BLANKET WOULD COST $50 (500/10)BUT IF THE EXCHANGE RATE WAS $1USD=5 PESOS

THE BLANKET WOULD COST $100 (500/5)

So what would happen if the US DOLLAR GAINED STRENGTH?

• LETS LOOK AT OUR ORGINAL EXCHANGE RATE OF $1USD = 10 PESOS AND CHANGE IT TO$1USD = 100 PESOS

• YOUR $100 PHONE WOULD NOW COST 10,000 PESOS IN MEXICO ($100 x 100= 10,000)

• BUT THE 500 PESO BLANKET MADE IN MEXICO WOULD NOW COST YOU $5 IN THE US.

(500 PESOS/100= $5)

WHO IS BENEFITS AND WHO LOSES?

• IN THE U.S.– BENEFITS: CONSUMERS HAVE ACCESS TO

CHEAPER GOODS– LOSES: PRODUCERS HAVE TO COMPETE WITH

CHEAPER IMPORTSIN MEXICO

BENEFITS: PRODUCERS CAN SELL THEIR PRODUCTS IN FOREIGN MARKETS EASIER

LOSES: CONSUMERS LOSE ACCESS TO CHEAPER PRODUCTS

HOW DO I DO CONVERSIONS?

• TRY TO US THE $1USD =? LIKE $1=2PESOS– If converting $USD to a foreign currency, multiply

the amount in $USD TIMES EXCHANGE RATE• MULTIPLY YOUR BAGS

-If converting foreign currency to $USD, divide the amount of foreign currency by the EXCHANGE RATE

• DIVIDE YOUR LAUNDRY

TRY THESE

ACTIVITY 18EXCHANGE RATES

How are Exchange rates effected by imports and exports

• Trade Deficits(x-M) results in the $ losing value in foreign exchange markets

• A trade Surplus (X-m) WOULD result in the dollar appreciating in value or becoming stronger.