ch15notes - International Finance and Exchange Rates...

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International Finance and Exchange Rates Nominal Exchange Rate currency domestic of unit currency foreign of units = E Real Exchange Rate: RER goods domestic of unit goods foreign of units Goods Foreign of Unit Currency Foreign Goods Domestic of Unit s $' $ Currency Foreign good foreign of price currency Foreign good domestic of price currency Foreign = × = = = w P EP
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Dollar Appreciation (Flexible Exchange Rates) Nominal Appreciation: Dollar buys more units of foreign currency: E Real Appreciation: Sale of domestic goods purchases more foreign goods: RER Dollar Depreciation (Flexible Exchange Rates) Nominal Depreciation: Dollar buys fewer units of foreign currency: E Real Depreciation: Sale of domestic goods purchases less foreign goods: RER Fixed Exchange Rates E : Revaluation E : Devaluation
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Purchasing Power Parity Goods have equal values in each country: 1 = = w P P E RER Long-run equilibrium nominal exchange rate: P P E w = Departures from PPP: Transportation costs Tariffs Taxes Nontraded goods
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Prices are based upon Tradable goods: hamburgers, pickles, buns Nontradable goods: real estate, labor
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ch15notes - International Finance and Exchange Rates...

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