Download International Payment flows

10.1: International Exchange
 Money: a medium of exchange used by a society
 Money can store value and act as a unit for accounting.
 Over time money has made a transition from silver or gold coins that had real
value to notes and coins that represent value because they are backed by
gold or something else of value.
 Today, most money acts as a means of
exchange without any real value
 Money has value only because the people who use it believe in it
 Currency is the term used for money in international market.
Gold
&
Silver
=
Real Value
US Dollars &
Coins
=
Assumed
Value
 International Market Money is categorized into two types of
currencies:
1. Hard Currency: Has the confidence of international traders


Comes from economically and politically stable countries.
Ex: the British pound, The Euro, US Dollar
2. Soft Currency: Not acceptable for international exchange



Unrealistic exchange rates
Economic or political instability within a country.
Ex: Mexican peso
 The law of supply and demand attempts to explain how changes in the
demand and quantity of goods sold in competitive markets impact a price.
 Low supply, high demand
 High supply, low demand
=
=
High Price
Low Price
 Demand: The quantity of a good or service that consumers are willing and
able to buy at a given price.
 Supply: The quantity that producers are willing to offer at a given price
 https://youtu.be/0yWsOZgsTSY
Demand
Supply
What Customers are willing
to buy @ that price
What suppliers are willing
to supply @ that price
$50
10 Units
60 Units
$40
20 Units
50 Units
$30
30 Units
41 Units
$20
38 Units
28 Units
$10
52 Units
10 Units
Price
Qty = Units Produced
 The changes in demand and supply are based on the:
 Nature of the product
 Nature of competition
 Needs of buyers and sellers
 The law of supply and demand works for most goods and services and also
holds true for the global demand for currency.
 Instead of changes in price, the exchange rate between countries will shift
 Most currency exchange rates are based on the law of
supply and demand
 Exchange Rate: Ratio of how much one currency is worth
in exchange for another
 The ratio of how much one currency is worth in terms of another currency
 Also referred as foreign-exchange rate.
 Example: $1 US = 42 Indian Rupees or
 1 Euro = $1.36 US.
 This means that on a given day 1 US dollar can buy 42 Rupees; or 1 Euro can buy
$1.36 dollars
 Floating currency exchange rates are based on law of Supply & Demand
 Determined by the demand for a currency and its supply
 Hard currencies usually float
 Pegged Currency: A set rate to another currency
1.
Transactional Demand: The amount of economic activity in a country creates
transactions—the more economic activity, the more transactions, therefore
greater demand for currency
2.
Economic Confidence: If international investors lose confidence in an economy,
they may try to sell the currency holdings resulting in to increased supply of the
currency and therefore decreased value of the currency.
3.
Money Supply: Interest rates effect the bank lending activities. When banks
drop interest rates, more money is borrowed resulting into increased economic
activities and supply of money. However too low of a interest rate causes inflation
and that makes the currency less desirable by foreign investors.
4.
Speculative Demand: Some international investors use forward events(ex:
elections) to speculate on future currency rates.