- Foreign Exchange-
- The buying & selling of currency.
- Any transaction that occurs in the Balance of Payments necessitates foreign exchange.
- The exchange rate (e) is determined by the foreign currency markets.
- Ex) Current exchange rate is approx. 8 yuan to 1 dollar.
- Simply put, the exchange rate is the price of a currency.
- Changes in Exchange Rate-
- Exchange rates (e) are a function of the supply & demand for currency.
- An increase in the supply of a currency will decrease the exchange rate of a currency.
- Decrease in demand of currency will decrease exchange rate of a currency.
- Increase in demand of currency will increase exchange rate of a currency.
- Decrease in supply of a currency will increase the exchange rate of a currency.
- Appreciation & Depreciation-
- Appreciation: When the exchange rate increases.
- Depreciation: When the exchange rate decreases.
- Ex) Changing euros to dollars will increase demand for dollars, causing dollars to appreciate & euros to depreciate.
- Exchange Rate Determinants-
- Consumer Taste
- Relative Income
- Relative Price Level
- Speculation
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