If a dollar buys more foreign currency there is an appreciation of the dollar

If a dollar buys more foreign currency there is an

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If a dollar buys more foreign currency, there is an appreciation of the dollar. Depreciation refers to a decrease in the value of a currency as measured by the amount of foreign currency it can buy. If it buys less there is a depreciation of the dollar. 18
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Real exchange rates The real exchange rate is the rate at which a person can trade the goods and services of one country for the goods and services of another. 19
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Real exchange rates 20 The real exchange rate compares the prices of domestic goods and foreign goods in the domestic economy. If a case of German beer is twice as expensive as Australian beer, the real exchange rate is 1/2 case of German beer per case of Australian beer.
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Real exchange rates 21 The real exchange rate depends on the nominal exchange rate and the prices of goods in the two countries measured in local currencies. The real exchange rate is a key determinant of how much a country exports and imports. Measured in local currency
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Real exchange rates A depreciation (fall) in the Australian real exchange rate means that Australian goods have become cheaper relative to foreign goods. This encourages consumers both at home and abroad to buy more Australian goods and fewer goods from other countries. As a result, Australian exports rise and Australian imports fall, and both of these changes raise Australian net exports. 22
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PURCHASING-POWER PARITY The purchasing-power parity theory is the simplest and most widely accepted theory explaining the variation of currency exchange rates. Purchasing-power parity is a theory of exchange rates whereby a unit of any given currency should be able to buy the same quantity of goods in all countries. 23 Law of 1 price
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Purchasing-power parity The theory of purchasing-power parity is based on a principle called the law of one price . According to the law of one price, a good must sell for the same price in all locations. If the law of one price were not true, unexploited profit opportunities would exist. The process of taking advantage of differences in prices in different markets is called arbitrage . (Buy in cheaper market and sell in expensive market) Eg, US $1 = S $1.40 Laptop USD - $1,000 , SGD - $1,600 US cheaper, demand go up, supply in sg go up Price in US increase, Price in Singapore decrease. When Singapore price decrease, no more arbitrage.
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