BEEB2023 Macro Chp 7 - BOP FOREX.ppt - CHAPTER 7 THE...

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CHAPTER 7 THE BALANCE OF PAYMENT & EXCHANGE RATES
Introduction The economies of the world have become increasingly interdependent. Economic events in one country can have repercussion on the economies of other countries.
International trade is a major part of today’s world economy. Why? Countries trade with each others to obtain G&S they cannot produce themselves or because other nations can produce G&S at a lower cost. There are various connections between the domestic economy with the rest of the world.
Foreign countries supply G&S, labor & capital to M’sia and M’sia supplies G&S, labor & capital to the rest of the world. When people in different countries buy from and sell to each other, an exchange of currencies must take place. Therefore, the direction of trade between the two countries depends on exchange rates (ER).
What is ER? ER – the price of one country’s currency in terms of the other country’s currency (ratio of two currency). Example: (a) RM/US$ = 3.800 (b) US$/RM = 0.2632
Within a certain range of ER, trade flows in both directions, each countries specializes in producing the goods in which it enjoys a comparative advantage and trade is mutually beneficial. Because ER is important in determining the flow of international trade, knowing the the way they are determined is also important.
Trading date: 19 Apr 2019 (Friday) Time: 1700 Foreign Currency Units MYR Foreign Currency Units MYR 1 Australian Dollar AUD 2.9546 100 Taiwanese New Dollar TWD 13.4039 1 Brunei Dollar BND 3.0473 100 Thai Baht THB 12.9772 1 Canadian Dollar CAD 3.0883 1 U.K. Pound GBP 5.3686 100 Cambodian Riel KHR 0.1017 1 U.S. Dollar USD 4.13 1 Chinese Renminbi CNY 0.616 100 Vietnamese Dong VND 0.0178 1 EURO EUR 4.6446 1 IMF Special Drawing Right SDR - 100 Hong Kong Dollar HKD 52.6443 1 New Zealand Dollar NZD 2.763 100 Indonesian Rupiah IDR 0.0294 100 Myanmar Kyat MMK 0.2713 100 Japanese Yen JPY 3.6898 100 Indian Rupee INR 5.9497 100 Korean Won KRW 0.363 100 United Arab Emirates Dirham UAE AED 112.427 100 Phillippine Peso PHP 7.9861 100 Pakistan Rupee PKR 2.9085 100 Saudi Arabian Riyal SAR 110.1304 100 Nepalese Rupee NPR 3.7214 1 Singapore Dollar SGD 3.0473 1 Egyptian Pound EGP 0.2394 1 Swiss Franc CHF 4.075 Copyright © 2019 Bank Negara Malaysia. All rights reserved.
Source: Bank Negara Malaysia
The World Monetary System The world monetary system has been changed several times by international aggrements and events. Early in the century, nearly all currencies were backed by gold which determined their values in international trading.
In 1944, with the international monetary system in chaos at the end of WWII, a group of experts unofficially representing 44 countries met in Bretton Woods, New Hampshire and drew up a number of agreements. Among the agreements were the establishment of a system of fixed ER under which each county agreed to intervene by buying & selling currencies in the forex market when necessary to maintain the agreed-upon value of its currency.

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