24+Exchange+Rates+and+International+Economic+Policy%2C+Part+1

24+Exchange+Rates+and+International+Economic+Policy%2C+Part+1

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 1 24-1 Exchange Rates and International Economic Policy, Part 1 24-2 Agenda 1. Foreign Exchange Rates and Markets 2. Exchange Rates in the Long-Run 3. Exchange Rates in the Short-Run 24-3 Foreign Exchange Rates and Markets Most countries have their own currencies. International trade and/or financial transactions require the exchange of the different currencies. The exchange rate is simply the price of one currency in terms of another currency. 24-4 Foreign Exchange Rates and Markets The nominal exchange rate, E, is the relative price of one currency in terms of another currency. The real exchange rate, , is the relative price of goods in one country in terms of another country. Also called the terms of trade . 2 24-5 Foreign Exchange Rates and Markets The real exchange rate is given by: = E x (P / P*) where: = the real exchange rate, E = the nominal exchange rate, P = the domestic general price level, and P* = the foreign general price level. 24-6 Foreign Exchange Rates and Markets The real exchange rate indicates whether a currency is relatively cheap or expensive. 1. When the real exchange rate is low (i.e., < 1), domestic goods are cheap relative to foreign goods. 2. When the real exchange rate is high (i.e., > 1), domestic goods are expensive relative to foreign goods. 24-7 Foreign Exchange Rates and Markets If prices are sticky , then nominal and real exchange rates should move together. 24-8 Foreign Exchange Rates and Markets 3 24-9 Foreign Exchange Rates and Markets Exchanges rates can be quoted two ways: 1. The amount of foreign currency per unit of domestic currency, a direct quote . For example, the number of yen per dollar. 2. The amount of domestic currency per unit of foreign currency, an indirect quote . For example, the number of dollars per euro. Direct quotes are easier to analyze. 24-10 Foreign Exchange Rates and Markets The foreign exchange market is where exchange rates are determined. This is where currency trading takes place. It is an over-the-counter market of several hundred dealers (mostly banks) actively buying and selling bank deposits denominated in foreign currencies....
View Full Document

This note was uploaded on 03/13/2012 for the course UGBA 115 taught by Professor Schultz during the Fall '11 term at University of California, Berkeley.

Page1 / 10

24+Exchange+Rates+and+International+Economic+Policy%2C+Part+1

This preview shows document pages 1 - 4. Sign up to view the full document.

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