Foreign Exchange (FOREX)
- the buying and selling of currency
*example: in order to purchase souvenirs in France, it is first necessary for Americans to sell their dollars and buy Euros
- any transactions that occurs in the balance of payments necessitates foreign exchange
-Exchange Rate (e) is determined in foreign currency markets
Changes in Exchange Rates
-exchange rates (e) are a function of supply and demand for currency
+an increase in the supply of a currency
+a decrease in supply of a currency will increase the exchange rate of currency
+increase in demand for currency will increase the exchange rate of currency
+decrease in demand for a currency will decrease the exchange rate of currency
Appreciation and Depreciation
-appreciation of currency occurs when exchange rate of that currency increases (e^)
-depreciation of a currency occurs when the exchange rate of that currency decreases
Exchange Rate Determinants
-consumer tastes
-relative income
-relative price level
-speculation
Exports and Imports
-exchange rate is a determinant of both exports and imports
-appreciation of the dollar causes american goods to be relatively more expensive and foreign goods to be relatively cheaper, thus reducing exports and increasing imports
-depreciation of the dollar causes american goods to be relatively cheaper and foreign goods to be relatively more expensive thus increasing exports and reducing imports
I really like how you set up your notes, making it more easy to read and thorough, as well. To have a better understanding of the exchange rate determinants, it would be great if you added examples of each determinant. For example, speculation is the investment in stocks in hope of gain but with the risk of loss.
ReplyDeleteGreat blog, Rolla I just wanted to elaborate on the meaning of currency appreciation which is of course stated in your blog to be when the exchange rate of that currency increases. Whenever a currency appreciates or strengthens in the exchange rate, this causes: More imports due to less expensive goods to buy, a balance of budget deficit and lower inflation.
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ReplyDeleteTo review quickly, an exchange rate is the rate at which one country's currency can be traded for another country's currency. Also when a currency appreciates it means it increased in value relative to another currency; depreciates means it weakened or fell in value relative to another currency.By the way i like how you take notes and setup your blog.
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