Exchange Rates and International Transactions a Domestic and Foreign Prices If we know the exchange rate between two countries currencies, we can compute the price of one country s exports in terms of the other country's money Example: The dollar price of a f50 sweater with a dollar exchange rate of $1.50 per pound is(1.50 $/f)X(E50) $75 Copyright C 2003 Pearson Education, Inc Slide 13-6
Copyright © 2003 Pearson Education, Inc. Slide 13-6 ▪ Domestic and Foreign Prices • If we know the exchange rate between two countries’ currencies, we can compute the price of one country’s exports in terms of the other country’s money. – Example: The dollar price of a £50 sweater with a dollar exchange rate of $1.50 per pound is (1.50 $/£) x (£50) = $75. Exchange Rates and International Transactions
Exchange Rates and International Transactions Two types of changes in exchange rates Depreciation of home country's currency A rise in the home currency prices of a foreign currency It makes home goods cheaper for foreigners and foreign goods more expensive for domestic residents Appreciation of home country's currency A fall in the home price of a foreign currency It makes home goods more expensive for foreigners and foreign goods cheaper for domestic residents Copyright C 2003 Pearson Education, Inc Slide 13-7
Copyright © 2003 Pearson Education, Inc. Slide 13-7 • Two types of changes in exchange rates: – Depreciation of home country’s currency – A rise in the home currency prices of a foreign currency – It makes home goods cheaper for foreigners and foreign goods more expensive for domestic residents. – Appreciation of home country’s currency – A fall in the home price of a foreign currency – It makes home goods more expensive for foreigners and foreign goods cheaper for domestic residents. Exchange Rates and International Transactions
Exchange Rates and International Transactions Exchange Rates and relative prices Import and export demands are influenced by relative prices Appreciation of a countrys currency Raises the relative price of its exports Lowers the relative price of its imports Depreciation of a country's currency Lowers the relative price of its exports Raises the relative price of its imports Copyright C 2003 Pearson Education, Inc Slide 13-8
Copyright © 2003 Pearson Education, Inc. Slide 13-8 ▪ Exchange Rates and Relative Prices • Import and export demands are influenced by relative prices. • Appreciation of a country’s currency: – Raises the relative price of its exports – Lowers the relative price of its imports • Depreciation of a country’s currency: – Lowers the relative price of its exports – Raises the relative price of its imports Exchange Rates and International Transactions
Exchange Rates and International Transactions able 13-2: $/ Exchange Rates and the Relative Price of American Designer Jeans and British Sweaters Exchange rate(S/E) 1.25 150 1.75 Relative price (pairs of jeans/sweater) 1.39 1.67 1.94 Note: The above calculations assume unchanged money prices of $45 per pair of jeans and f50 per sweater Copyright C 2003 Pearson Education, Inc Slide 13-9
Copyright © 2003 Pearson Education, Inc. Slide 13-9 Exchange Rates and International Transactions Table 13-2: $/£ Exchange Rates and the Relative Price of American Designer Jeans and British Sweaters
The Foreign Exchange Market Exchange rates are determined in the foreign exchange market The market in which international currency trades take place The actors The major participants in the foreign exchange market are Commercial banks International corporations Nonbank financial institutions Central banks Copyright C 2003 Pearson Education, Inc Slide 13-10
Copyright © 2003 Pearson Education, Inc. Slide 13-10 The Foreign Exchange Market ▪ Exchange rates are determined in the foreign exchange market. • The market in which international currency trades take place ▪ The Actors • The major participants in the foreign exchange market are: – Commercial banks – International corporations – Nonbank financial institutions – Central banks