Download The Olympics - Federal Reserve Bank of St. Louis

Key Concepts
• Capital Investment
– Building commercial facilities or purchasing assets for the
purpose of expanding a business.
• Examples: manufacturing plants, new machinery, etc.
• Foreign Direct Investment
– The purchase by foreign entities of existing business
assets or the creation of new business assets in country.
• Examples: Buying a stake in a foreign company, expanding
business operations to another country, etc.
• Supply and Demand (in the determination of exchange
rates)
What affects the supply and demand of currencies?
• Various factors influence a country’s exchange
rate. Such as:
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Exchange rate: the price of one nation’s currency in terms of
another.
Changes in preferences for foreign goods.
Changes in prices in different countries.
Changes in the interest rates in different countries.
Changes in incomes in different countries.
Speculation.
Simulation Roles
• Foreign Firms
– Objective: Purchase yen so you can invest in capital in
Japan
– Objective: Make the highest ROI (Return on Investment)
• Bank of Japan
– Objective: Sell your country’s currency to buyers.
Foreign Exchange Market
- The market in which global currencies are traded and exchange rates are
determined by changes in supply and demand for those currencies.
Firm
Yen
Dollars
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And the 2020 Olympics Games go to…
Why are the Japanese so happy?
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International recognition
Winning a tough bidding process
Lasting legacy
Increased tourism (500,000+ people visited London
during the 2012 Olympics and the city benefited
from increased infrastructure and venue
investments.)
• Tokyo will now be the benefactor of hundreds of
thousands of visitors in the coming year
• Investment in Japan will increase
Foreign Exchange Market
Firm
Yen
Dollars
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Simulation Debriefing
• What effect did the announcement of the Olympics
have on your desire to invest in Japan? Why?
– Increased because there was more potential for a return on
the investment.
• How did the Olympics affect your demand for
Japanese Yen? Why?
– Increased, Japanese currency was needed to invest in Japan.
• As a result of this increased demand, what happened
to the price of yen?
– Increased. When demand for yen increase, the number of
dollars needed to buy each yen increased.
Changes in Supply and Demand
• Changes in preferences
for foreign goods.
– Example: Americans want to
buy more Japanese goods.
• Demand increases
• Yen appreciates
Changes in Supply and Demand
• Changes in price level in
different countries.
– Example: Inflation increases
in the Europe and remains
constant in the U.S.
• Demand increases
• Dollar appreciates
asp.tosm.ttu.edu
Changes in Supply and Demand
• Changes in the interest
rates in different
countries.
– Example: Interest rates rise
in the U.S. and remain
constant in China.
• Supply increases
• Yuan depreciates
www.cmsfx.com
Changes in Supply and Demand
• Changes in the interest
rates in different
countries.
– Example: Interest rates rise
in the U.S. and remain
constant in China.
• Supply increases
• Yuan depreciates
www.cmsfx.com
Changes in Supply and Demand
• Changes in incomes in
different countries.
– Example: Real GDP per
capita in the U.S. rises
relative to Australia.
• Demand increases
• Australian dollar
appreciates
www.cmsfx.com
Changes in Supply and Demand
• Speculation
– Example: The IOC
announces London as the
host of the 2012 Olympic
games.
• Demand increases
• British pound appreciates
www.cmsfx.com
Answers to Student Activity 1; 1-3
1. 1st night = 2970 yuan (300/.101); 2nd night = 3030 yuan
(300/.099);
of 60 yuan
2. The pound appreciated; the dollar depreciated
3. Basic answer – AFTER (808 vs. 802);
– Advanced Answer – Buy pounds before and buy euros with
the pounds during the Olympics;
– $1000 before = 643 pounds = 817 Euros during the Olympics
Answers to Student Activity 1; 4-6
4. Before. The yuan appreciated against the Euro after
the Olympics began.
5. Before. 5,000 pounds = 67,505 Yuan (5000 * 13.501).
After the Olympics began, 5,000 pounds = 65,805 Yuan
(5000 * 13.161).
6. Before, because once the Olympics begin, it is more
expensive to purchase Chinese Yuan, therefore
countries are less likely to import from China.
Answers to Student Activity 1
7. China is much larger than the UK. China’s managed
exchange rate tends to remain stable.
8. Buy currency before the games begin, but don’t expect major
changes because there are many factors that go into exchange
rates.
9. British travelers abroad, British companies/citizens importing
goods, people with savings accounts in British Pounds, etc.
10. Foreign travelers in China, Chinese exporters trying to ship
goods abroad, Chinese citizens holding foreign investments,
etc.
Economic Impact of London Olympics
Economic Impact of London Olympics