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lecture notes march 29

lecture notes march 29 - A Nominal Exchange Rate a Relative...

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A.)Nominal Exchange Rate a. Relative price of two currencies often expressed as number of units of local or home currency required to buy a unit of foreign currency b. The book treats Mexico (peso) as our home country and United States (dollar) as our foreign country (!!!) c. Nominal currency exchange rate (E) is i. E= (local currency)/(foreign currency) ii. If E is increasing, then the value of my local currency is depreciating, if you need more pesos to by one dollar, that means that the value of the peso is declining iii. If E is decreasing, then you need fewer pesos to buy a foreign dollar, the value of my local currency is increasing, the local currency is appreciating in value iv. E and the value of the peso are inversely related 1. E is often graphed as its inverse which is now equal to the value of the peso B.)Real Exchange Rate a. Measure the rate at which two countries goods trade against each other b. Real exchange rate shows the rate at which Mexican goods trade against American goods c. Makes use of the price levels in the two countries under consideration i. Pm – overall price level in Mexico (the home country), when PM increases, it means that Mexican goods increase in price, therefore it takes fewer Mexican goods to buy a unit of US goods, the real value of the peso has rise ii. Pus- overall price level in US (foreign country), when P us increase, US goods increase in price, therefore it takes more Mexican goods to buy a unit of US goods iii. Re = e* (pus/pm) d. If re is increasing that is a real peso depreciation e. If re is decreasing, that is a real peso appreciation, the peso price of US goods has declined in compared to US prices C.)Price Level

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