Lecture10 - Lecture 10 Exchange Rates and the Open Economy...

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ECON1002 Introductory Macroeconomics 1 Lecture 10 Exchange Rates and the Open Economy At the end of this lecture, we expect you to understand… 1. The concepts of nominal and real exchange rates 2. How to calculate the real exchange rate 3. Why real exchange rates measure competitiveness 4. The concept of the PPP 5. How the nominal exchange rate is determined in the market 6. How monetary policy influences the nominal exchange rate.
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ECON1002 Introductory Macroeconomics 2 Country Foreign currency/dollar (A$) Dollar (A$)/foreign currency United States dollar 1.0866 European euro 0.7545 Japanese yen 87.92 Chinese renminbi 7.0545 South Korean won 1168.04 UK pound sterling 0.6642 Trade Weighted Index 79.0 Rates as of 11 May 2011. Source: http://www.rba.gov.au/statistics/frequency/exchange-rates.html Nominal Exchange Rates Nominal exchange rates show the prices of one currency in terms of another currency (or a set of other currencies )
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ECON1002 Introductory Macroeconomics 3 Nominal Exchange Rates Exchange rates are quoted as: either foreign currency per unit of domestic currency e.g. $US/$A = 1.0866 or domestic currency per unit of foreign currency. e.g. $A/$US = 0.9203 In most cases, we use the first definition of the nominal exchange rate , the price of the domestic currency in terms of the foreign currency (i.e. $US/$A ).
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ECON1002 Introductory Macroeconomics 4 $US per $A ( e ) Nominal depreciation of 2.4% We also refer to this as a weakening of the $A Nominal appreciation of 5.2% We also refer to this as a strengthening of the $A nominal exchange rate Nominal Exchange Rates Source: http://www.rba.gov.au/Statistics/HistoricalExchangeRates/index.html Aug-2010 0.8918 Sep-2010 0.9667 Oct-2010 0.9761 Nov-2010 0.9618 Dec-2010 1.0163 Jan-2011 0.9924 Feb-2011 1.0163 Mar-2011 1.0334 Apr-2011 1.0900
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ECON1002 Introductory Macroeconomics 5 It is a measure of international competitiveness : the relative “cheapness” of a country’s commodities. Domestic residents must decide whether to buy
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This note was uploaded on 08/18/2011 for the course ECON 1002 taught by Professor Markmelatos during the Three '10 term at University of Sydney.

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Lecture10 - Lecture 10 Exchange Rates and the Open Economy...

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