Lecture 2

# Lecture 2 - ECN 211 Macroeconomic Principles L25 Theories of Exchange Rates Recap Exchange rates.The price of one currency in terms of another

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ECN 211 Macroeconomic Principles L25: Theories of Exchange Rates

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Recap: Exchange rates ……. .The price of one currency in terms of another. Example: 1 sells for \$1.4 Define: “E” is the number of domestic units (dollars ) required to purchase one unit of a foreign currency (Euro). – In the example above E is 1.4
Recap: Appreciation and Depreciation . If the exchange rate last year was \$2.0: 1. But this year the exchange rate was \$1.5: 1. What has happened to the dollar over the year? The dollar has appreciation against the euro. – “E” decrease from 2 to 1.5 – Of course this must mean the euro has depreciation against the dollar!! Remember changing exchange rates affect the domestic price of foreign goods.

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Recap: Price of goods and services. Domestic price of a foreign good = foreign currency price * exchange rate (E) Q) Suppose the exchange rate is \$1.50: 1. If a bottle of French wine is 25 Euros what is the dollar price for the wine? A) dollar price = So far we have simply converted the price of a foreign good into its dollar amount. Dollar appreciate: Imports increase and Exports decrease
What about if the good was the same in both countries? • If a US citizen finds that goods sell for the same price in the US and UK (when converted into a common currency) then we have PPP Purchasing Power Parity:

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## This note was uploaded on 03/03/2010 for the course ECN 211 taught by Professor Kingston during the Spring '08 term at ASU.

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Lecture 2 - ECN 211 Macroeconomic Principles L25 Theories of Exchange Rates Recap Exchange rates.The price of one currency in terms of another

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