NOTE_Lecture_22_-_intl_finance

NOTE_Lecture_22_-_intl_finance - 10/1/2009 International...

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10/1/2009 1 International Finance Objectives Financing international trade The flexible exchange rate system How are exchange rates determined? Appreciation vs. depreciation and impacts of changes in the exchange rate The balance of payments Definition Components: current account, capital account Financing international trade When a U.S. firm or citizen purchases a foreign good, it pays $ for the purchase But to pay for production of the good, the foreign producer must pay its workers in its own currency Therefore, whenever international trade takes place, there must be a corresponding change in currencies to pay for the good
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10/1/2009 2 The floating or flexible exchange rate system, 1973 to present Today, the exchange rate is allowed to “float” and the forces of supply and demand are what determines what the exchange rates will be. Quantity of dollars Exchange rate (yen/US$) D (for $) S (of $) (yen/$)e Qe The floating or flexible exchange rate system, 1973 to present Foreign exchange market: the market where foreign exchange is bought and sold. Like other markets, the market for foreign exchange (i.e., foreign currency) is determined by the demand and supply of foreign exchange. Foreign exchange rate: the price of one currency in terms of another currency, i.e., the P of the foreign exchange What factors affect demand (and supply) of foreign exchange? Let’s consider the market for yen, where the yen is exchanged for U.S. dollars. Who demands (or buys) yen? Or alternatively, who has dollars and sells them for yen? Americans! But why do they want yen and are willing to sell $? That is, what are the motives behind the demand for yen?
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10/1/2009 3 The demand for yen represents the desire of Americans to exchange their dollars for yen. Americans would want yen to: Buy Japanese goods and services Invest in Japan’s stocks, bonds, real estate, and other assets Travel to Japan What factors affect demand (and supply) of foreign exchange? Another way of looking at the demand for yen: The relative price levels between the two countries The relative growth of the two countries economies The relative level of interest rates in the two countries What factors affect demand (and supply) of foreign exchange? What factors affect demand (and supply) of foreign exchange? Note that these motives also explain why Americans would want to sell dollars for yen That is, the demand for yen is the same as the supply of U.S. dollars ($)!
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10/1/2009 4 Appreciation vs. depreciation Let’s consider the market for yen. At the current D and S for yen, the $/yen exchange rate would be at ($/yen)e… And the quantity of yen exchanged (bought and sold) would be at Qe. yen
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This note was uploaded on 05/22/2011 for the course ECON 1B taught by Professor Jamie during the Spring '06 term at West Valley.

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NOTE_Lecture_22_-_intl_finance - 10/1/2009 International...

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