- It is the buying and selling of currency.
- The exchange rate (e) is determined in the currency markets
- Current exchange is 77 Japanese Yen to 1 dollar.
- The exchange rate is the price of a currency.
- Do not try to calculate the exact exchange rate.
Tips
- Always change the D line on the one currency graph, the s libe on the other's currency graph
- Move the lines of the two currency graphs i the same direction (right or left) and you will have the correct answer
- If D on one graph increases, S on the other will increase too
- If D moves left to the left, S will move to the left on the other graph.
Changes in the Exchange Rate
- Exchange rates (e) are a function of the supply and demand for currency.
- An increase in the supply of a currency will make it cheaper to buy one unit of that currency.
- A decrease in supply of a currency will make it more expensive to buy one unit of that currency.
- An increase in the demand of a currency will make it more expensive to to buy one unit of that currency.
- A decrease in demand of a currency will make it cheaper buy one unit of that currency.
Dollar Market Graph
Appreciation
- Appreciation of a currency occurs when the exchange rate of that currency increases.
- 100 Yen used to buy $1, now 200 Yen buys $1
- The dollar is stronger because one buys more Yen than it used to.
Depreciation
- Occurs when the exchange rate of that currency decreases
- 100 Yen used to buy $1 now 50 Yen buy $1
- The dollar is weaker because it takes fewer Yen to buy one dollar.
International Trade
Purchasing Power Parity
- When currency rate are set by international market, changes will be based o the purchasing power of the currency
- If US dollar to the European Euro is 1.5 to 1, then each $1.50 will buy one euro. However if a item in US cost a $1.50 and then cost more or less than one euro, the parity is lost.
- Markets will adjust quickly in floating rates or pressure for change will occur in fixed rates.
Why do we exchange currencies?
- To sell export and buy imports.
- To invest in another country's stocks and bonds.
- To build stores or factories in another country.
- To speculate on currency values
- To hold currencies in bank accounts for future exports, imports and business loans.
- To control excessive imbalances.
Even though our notes on Foreign Exchange Markets is almost identical, what I didn't have you did. Your notes specifically touched on purchasing power parity and reading it from your blog opened my eyes.
ReplyDeleteThe graph you posted doesn't exactly show the relationship in both markets. As ou move supply in one markets, damand moves in the other. As you move demand in one market, supply moves on the other.
ReplyDelete