ch10 (2) - The value of 1 euro Example consider the...

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The value of 1 euro Example: consider the exchange rate E $/€ E $/€,t = $1.06, E $/€ ,t+1 = $1.28 An euro buys (1.28-1.06)/1.06 = 21% more U.S. dollars. We would say the euro has appreciated by (about) 21% against the U.S. dollar. The value of 1 dollar Example: the exchange rate E €/$ E €/$,t = €0.95, E €/$,t+1 = €0.78 A U.S. dollar buys (0.95-0.78)/0.95 = 18% fewer euros. The dollar has depreciated by (about) 18% against the euro. The bilateral exchange rate, as seen above, shows the price at which one currency is exchanged for another. In practice, it is possible for one currency to appreciate relative to one currency, while depreciating relative to another. In order to understand the “average” change in the value of a currency, we need to use a multilateral exchange rate. The nominal effective exchange rate (NEER) is calculated as the sum of the trade shares multiplied by the exchange rate changes for each country. The dollar weight of each currency in the basket (in a base year) is given by
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This note was uploaded on 03/02/2012 for the course EC 340 taught by Professor Ballie during the Spring '10 term at Michigan State University.

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ch10 (2) - The value of 1 euro Example consider the...

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