Chapter 14 Exchange Rates and Their Determination.ppt

Copyright ? 2009 Pearson Education, Inc. Publishing as Prentice Hall 14 – * C h a p t e r 1 4 To accompany International Economics, 3e by Sawyer/Sprinkle PowerPoint slides created by Jeff Heyl Copyright ? 2009 Pearson Education, Inc. Publishing as Prentice Hall Exchange Rates and Their Determination: A Basic Model CHAPTER ORGANIZATION Exchange Rates The Demand for Foreign Exchange The Supply of Foreign Exchange Equilibrium in the Foreign Exchange Market Changes in the Equilibrium Exchange Rate Exchange Rate Volatility and International Trade Summary INTRODUCTION The international value of a country’s currency has become an inescapable part of the daily flow of economic information Most people don’t have a clear understanding of why the exchange rate matters and what causes it to change Why does the supply and demand model work for foreign exchange? What do economists know about the effects of exchange-rate volatility on international markets? EXCHANGE RATES Demand and supply forces determine the exchange rate An increase in the value of a currency is referred to as an appreciation A decrease in the value of a currency is referred to as a depreciation EXCHANGE RATES The percentage appreciation or depreciation of the spot rate over time EXCHANGE RATES A rise in the exchange rate means the domestic currency has depreciated If the exchange rate falls the domestic currency has appreciated EXCHANGE RATES Figure 14.1(a) Foreign Exchange Rates of the U.S. Dollar 0.95 – 0.90 – 0.85 – 0.80 – 0.75 – 0.70 – 0.65 – 0.60 – 1980 1983 1986 1989 1992 1995 1998 2001 2004 U.S. Dollars per Canadian Dollar Exchange RatesGBP,CAD, EUR,YUAN Exchange RatesGBP, EUR, JPY, YUAN THE DEMAND FOR FOREIGN EXCHANGE Demand for FX comes from demand for foreign products and services FX demand curve slopes_______ because_______ THE DEMAND FOR FOREIGN EXCHANGE Figure 14.2 The Demand for Foreign Exchange $/Pounds $3 $2 $1 ￡1 ￡2 ￡3 Pounds Demand for Pounds (D) A B C THE DEMAND FOR FO