12.01.08 - ECONOMICS 1 Professor Kenneth Train 12/01/08...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
ECONOMICS 1 Professor Kenneth Train 12/01/08 Lecture 27 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. ANNOUNCEMENTS LECTURE How’s everybody doing? Did you enjoy the break? We’re almost done with this course! Today we’re continuing our discussion of trade. Last lecture I convinced everyone about the benefits of trade. Today we’ll open our economy to trade to see how it affects the economy and how fiscal and monetary policies are affected. EXCHANGE RATES The whole issue of trade revolves around exchange rates. Now we have one more concept to consider; we had aggregate output; price; and now exchange rates. It’s hard to think of these, but just think about what’s being done. The exchange rate is the price of a currency in terms of another currency. Here it’s how many dollars you have to pay to get another currency. It is also how much of a currency you need to buy another dollar. Dollars are not the same as money. Money is liquid assets and dollars is US assets hold in US currency. When consumers make decisions they decide how much to save and then of that savings how much to hold in liquid assets, which determines the interest rate, and how much they want to hold in US dollars as opposed to other currencies. Example of exchange rates The exchange rate is always bi-lateral. In my example I’m going to use the British pound and the US dollar. 1 pound = 2 US dollars 1 US dollar = ½ pound Say that one British pound costs two US dollars. If you have the exchange rate for pounds in dollars that’s how much you have to pay; you can do the reciprocal too: just divide both sides. One dollar costs half a pound. Exchange rate affects prices of imports and exports The most important thing the rate affects is the cost of imports and exports. It is the medium through which demand travels across country borders. It affects both parties. Exports: fighter planes The U.S. is good at making fighter planes. If a fighter plane costs $3 million it comes out of the exchange rate as costing 1.5 million pounds. That means that if Britain wants to buy a plane they have to come up with 1.5 million pounds to do it. Imports: British sweaters Imports do the reciprocal. Britain makes nice things like sweaters; so if a sweater costs 10 pounds in Britain it will cost $20 in the U.S. So, changes in
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
ECONOMICS 1 ASUC Lecture Notes Online: Approved by the UC Board of Regents 12/1/08 D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. 2
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 07/25/2011 for the course ECON 1 taught by Professor Martholney during the Fall '08 term at University of California, Berkeley.

Page1 / 7

12.01.08 - ECONOMICS 1 Professor Kenneth Train 12/01/08...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online