Exchange Rates
Currency Markets
Exchange Rates
Exchange rates: is the price of one country’s currency in terms of
another country’s currency.
Determining exchange rates
1. Fixed exchange rate: an established price for a
foreign currency that is tied to a stable currency
of a developed country.
2. Floating (flexible) exchange rate: the forces of
supply and demand establish the value of one
country’s currency in terms of another country’s
currency.
How are exchange rates expressed
• One countries currency is equal to ??? Units
of another countries currency.
Like this table:
1 USD/In USD
Argentine Peso
Australian Dollar
Bahraini Dinar
$1
8.726561
1.277665
0.376999
How are exchange rates expressed
• $1USD= 8.73 Argentine Pesos
• $1USD=1.28 Australian Dollar
• $1USD=.377 Bahraini Dinar
Which currencies are stronger than the dollar and
which are weaker?
1 USD/In USD
Argentine Peso
Australian Dollar
Bahraini Dinar
$1
8.726561
1.277665
0.376999
You can tell by:
• If $1USD gets you MORE THAN 1 unit of the
other currency, they U.S. dollar is stronger.
– I.E. $1USD= 8.73 Argentine pesos
– And $1USD= 1.28 Australian Dollars
• IF $1USD gets you LESS THAN 1 unit of the other
currency, they U.S. dollar is weaker
• $1USD= .377 Bahraini Dinar
What does “Strong” and “Weak”
mean?
Change in the exchange rates
Strong= More Valuable
Weak= Less valuable
How do you identify if a currency is
gaining or losing it’s strength
Change in the exchange rates
1. Currency appreciation: is the gain of
value of a country’s currency with respect
to one or more foreign currencies.
A. Benefits consumers, but can hurt
producers.
2. Currency Depreciation: When a nation’s currency loses
value.
A. Hurts consumers but benefits producers
How do exchange rates change?
• Supply and demand for currencies can change
the value for currencies.
Market for $USD
Value
For international trade, we will focus
on the DEMAND for a currency
• Exports and Imports can effect the demand
for a currency
• When a country’s exports are desired, they
want to be paid in their own currency.
– For example: If you sold your phone to a person
in Mexico, would you want them to pay you in
pesos?
– OF COURSE NOT!! YOU WANT $USD!!!
THIS TAKES PLACE ON THE FOREIGN
CURRENCY EXCHANGE MARKET
• THE PESOS WILL BE TURNED INTO $$$$$$
– EXAMPLE: YOU SOLD YOUR PHONE TO A PERSON IN
MEXICO FOR $100.
• If the exchange rate was $1 USD is equal to 10 PESOS or
$1USD = 10 PESOS, how many PESOS would that $100
phone cost that person in Mexico?
• CAN YOU FIGURE IT OUT?
THIS IS HOW WE DO IT
How? 10 PESOS/$ X 100 = 1,000 pesos.
Answer: 1,000 pesos.
Which CURRENCY is more valuable?
–The United States dollar is more valuable.
»It takes 10 pesos to equal only 1 dollar
When currency values change, your $100 phone
could change in terms of Pesos
• LETS SEE WHAT HAPPENS IF THE MEXICAN PESO HAS
GAINED VALUE
– IF THERE WAS AN INCREASE IN DEMAND FOR THE
PESO, THE PESO WOULD APPRECIATE IN VALUE
MARKET FOR PESOS
VALUE
CURRENCY APPRECIATION
• LETS SAY THAT THE NEW EXCHANGE RATE BECAUSE OF THIS
NEW DEMAND FOR THE PESO HAS CHANGED THE EXCHANGE
RATE FROM $1USD = 10 PESOS
–TO: $1 = 5 PESOS
– LETS SAY A PERSON IN MEXICO COULD BUY YOUR
PHONE(WHICH WAS MADE IN USA) FOR $100 OR A
PHONE MADE IN MEXICO FOR 1000 PESOS
• NOW HOW MUCH WOULD YOUR $100
PHONE COST IN PESOS?
• WHICH PHONE SHOULD THE PERSON IN
MEXICO PURCHASE??????
BECAUSE OF APPRECIATION…
• $1USD = 5 PESOS
YOU STILL WANT TO RECEIVE $100 RIGHT?
YOUR PHONE DID COST 1,000 PESOS
BUT NOW……..
PHONE= 5 PESOS X 100 = 500 PESOS!!!!!
SO NOW THE PERSON IN MEXICO WOULD RATHER
BUY YOUR PHONE FOR 500 PESOS RATHER THAN A
PHONE MADE IN MEXICO FOR 1000 PESOS.
WHAT DOES THIS MEAN FOR
PRODUCERS AND CONSUMERS?
• BENEFIT– IN MEXICO, THE CONSUMERS BENEFIT BECAUSE
THEY HAVE ACCESS TO CHEAPER PRODUCTS
FROM THE U.S. RATHER BUY A 500 PESO PHONE
THAN A 1000 PESO PHONE
– IN THE U.S., PRODUCERS BENEFIT BECAUSE THEIR
EXPORTS ARE CHEAPER FOR OTHER COUNTRIES
TO BUY. YOU RECEIVE YOUR $100 EITHER WAY
WHAT DOES THIS MEAN FOR
PRODUCERS AND CONSUMERS?
• WHO LOSES FROM THIS?????
– IN MEXICO, THE PRODUCERS LOSE BECAUSE THEY
HAVE TO COMPETE WITH CHEAPER AMERICAN
IMPORTS AND MAY LOSE A SHARE OF THE
MARKET
– IN THE U.S. CONSUMERS WILL LOSE BECAUSE
GOODS THEY USE TO PURCHASE FROM MEXICO
WILL NOW BE MORE EXPENSIVE
• WHAT???!!!?? WAIT!! WHY ARE MEXICAN PRODUCTS
NOW MORE EXPENSIVE?
WHY ARE MEXICAN GOODS NOW
MORE EXPENSIVE IN THE U.S.?
• THE EXCHANGE RATE CHANGED
– $1 WAS WORTH 10 PESOS
– NOW $1 IS ONLY WORTH 5 PESOS
• SO LETS CHANGE THE PERSPECTIVE
IF YOU WANTED TO BUY A BLANKET MADE IN MEXICO
AND IT IS PRICED IN MEXICO AT 500 PESOS
IF THE EXCHANGE RATE WAS $1USD=10 PESOS
THE BLANKET WOULD COST $50 (500/10)
BUT IF THE EXCHANGE RATE WAS $1USD=5 PESOS
THE BLANKET WOULD COST $100 (500/5)
So what would happen if the US
DOLLAR GAINED STRENGTH?
• LETS LOOK AT OUR ORGINAL EXCHANGE RATE OF
$1USD = 10 PESOS AND CHANGE IT TO
$1USD = 100 PESOS
• YOUR $100 PHONE WOULD NOW COST 10,000
PESOS IN MEXICO
($100 x 100= 10,000)
• BUT THE 500 PESO BLANKET MADE IN MEXICO
WOULD NOW COST YOU $5 IN THE US.
(500 PESOS/100= $5)
WHO IS BENEFITS AND WHO LOSES?
• IN THE U.S.
– BENEFITS: CONSUMERS HAVE ACCESS TO
CHEAPER GOODS
– LOSES: PRODUCERS HAVE TO COMPETE WITH
CHEAPER IMPORTS
IN MEXICO
BENEFITS: PRODUCERS CAN SELL THEIR PRODUCTS IN
FOREIGN MARKETS EASIER
LOSES: CONSUMERS LOSE ACCESS TO CHEAPER
PRODUCTS
HOW DO I DO CONVERSIONS?
• TRY TO US THE $1USD =? LIKE $1=2PESOS
– If converting $USD to a foreign currency, multiply
the amount in $USD TIMES EXCHANGE RATE
• MULTIPLY YOUR BAGS
-If converting foreign currency to $USD, divide
the amount of foreign currency by the
EXCHANGE RATE
• DIVIDE YOUR LAUNDRY
TRY THESE
ACTIVITY 18
EXCHANGE RATES
How are Exchange rates effected by
imports and exports
• Trade Deficits(x-M) results in the $ losing value
in foreign exchange markets
• A trade Surplus (X-m) WOULD result in the
dollar appreciating in value or becoming
stronger.