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Transcript
Exchange rates Nominal exchange rates : “The price of one country’s currency in terms of another” Example : 1 British pound = 49 baht Appreciation in currency means there is an increasing in the exchange rates. The foreign country finds that other country’s currency becomes more expensive to buy. Depreciation in currency means there is a decreasing in exchange rates. The foreign country finds that other country’s currency becomes cheaper to buy. Trade- weighted exchange rates is the way to evaluate the significant of the effects resulting from a changing in exchange rates by weighting its value according to the amount of trade carried out with each trading partners. For example, if the main trading partner is the UK then the action of the currency against pound is likely to be the most important movement. Real exchange rates: “The value of one country’s products in term of another country’s In other words it is the nominal exchange rate that is adjusted by the rate of inflation.” For example: UK has 10% inflation Thailand has 5% inflation Then 10-5= 5% this means the UK’s currency is higher than the nominal value by 5% without any change in nominal exchange rates. (higher prices mean an appreciation of the real exchange rate, other things equal) Effect of changing exchange rate on the economy Strong currency – lower import prices, help to control the rate of inflation, improve the terms of trade ( export become more expensive) -Rising in import lead to trade deficits (more imports than exports) which causes the exporters to lose price competitiveness, sell less, less profit, more unemployment and less economic growth For a weak currency, a reverse effect occur. Determination of Exchange Rates Floating Exchange Rate • Determined by the private market through supply and demand. •Government controls the quantity of the currency by selling and buying assets e.g. foreign money and gold. •self-correcting (low demand– depreciation– cheap – more demand) (low supply– appreciation – expensive – high supply) •Uncertainty for investors Fixed Exchange Rates • Set by the government or the central bank •No fluctuations •Provide certainty for investors •Low rate of inflation •not necessary to keep high levels of reserves e.g. China, since 2010 the rate fluctuated Managed Float Exchange Rate •Preferred for most of the countries • The value of the currency is determinate by the market forces and where the government can intervene if needed. •balance o payment deficit can be automatically adjusted by market system •Interest rates are determined by the government E.g. Thailand Factors underlying fluctuations in exchange rates Exchange rate will increase when •Inflation is low •Interest rate for foreign borrowing is high •There is a current account deficit(supply more of its own currency, excess demand for foreign currencies) •Terms of trade improve •Political Stability and Economic Performance(for investment)