- A market in which various national currencies are exchanged for another
- Exchange rates: equilibrium prices in the markets
- Two points of foreign exchange market:
1. A competitive market: Characterized by large numbers of buyers and sellers dealing in standardized products such as euro, yen, and dollar
2. Linkages to all domestic and foreign prices: Market price or exchange rate of a nation's currency is an unusual price that links all domestic prices with all foreign prices
Dollar-Yen Market
- How foreign exchange market works can be seen through dollars and yen:
1. U.S. firms exporting goods to Japan want payments in dollars, not yen
2. The Japanese importers to those U.S. goods only possess yen, not dollars
WHAT HAPPENS?
3. Japanese importers supply their yen in exchange for dollars in foreign exchange market
4. U.S. importers do the same so that they are able to pay in yen, not dollars
- We then have a market in which "price" is in dollars and the "product" is yen
- Depreciation: the international value of the dollar has declined
-When the dollar depreciates, demand increases and supply decreases
- Appreciation: the international value of the dollar has increased
-When the dollar appreciates, demand decreases and supply increases
Examples:
1. Because of domestic issues with the United States, the U.S. decides to boycott French products
Dollar appreciates, U.S. exports decrease, U.S. GDP decreases
2. We are already trading with Argentina but inflation skyrockets in Argentina
Dollar appreciates, U.S. exports decrease, U.S. GDP decreases
3. American tourists increase visits to Britain
USD depreciates and Pounds appreciates
4. The US government significantly decreases personal income tax
USD depreciates and Pounds appreciates
5. Inflation in Britain rises significantly faster than in the U.S.
USD appreciates and Pound depreciates
6. Britain has a large budget deficit that increases British interest rates
USD depreciates and Pound appreciates
7. The U.S. suffers a larger recession
USD appreciates and Pound depreciates
Hello there. You blog is incredibly helpful and thank you for posting some examples. This is not a part of the notes that we take in class but there are some helpful tips for the graph that I want to share.
ReplyDelete1. Always change the Demand line on one currency graph, and the Supply line on the other currency graph.
2. Move the lines of the two currencies graph in the same direction (right or left).
3. If Demand of one graph increases, then the Supply of other graph will also increases.
4. If Demand of one graph moves to the left, then the Supply of other graph will also move to the left.
I hope these tips help your note to be more clear and accurate when it comes to graphing. Beside all of that, your blog is great.