Foreign Exchange

5-8-17

• Buying and selling of currency
• Any transaction that occurs in the Balance of payments necessitates foreign exchange
• The exchange rate(e) is determined in the foreign currency markets
• simply exchange rate is the price of currency

Change in exchange rate

• exchange rates are a function of the supply and demand for currency
• increase in supply of currency will decrease exchange rate of currency
• decrease in supply of currency will increase in exchange rate of currency
• increase in demand for currency will increase exchange rate of currency
• decrease in demand for currency will decrease the exchange rate of currency

Appreciation and Depreciation

• Appreciation of currency occurs when the exchange rate of that currency increase (e Increase)
• Depreciation of a currency occurs when the exchange rate of that currency decreases(e decreases)

Determinants

1. Consumer taste
2. Relative income
3. relative price level
4. 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 cheaper and foreign goods to be relatively more expensive this increasing exports and reduce imports