Download Macro Chapter 5

Chapter 5
Presentation 3
Exchange 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 Market
Exchange Rates
Dollar – Yen Market
G 5.1
P
Dollar price of 1 yen
Sy
Exchange Rate:
$.01=¥1
.01
Dy
Qe
Quantity of yen
Q
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