EXCHANGE RATES

EXCHANGE RATE

The price at which one currency can be exchanged/traded for another

1. Actors in the Foreign Exchange Markethttp://www.youtube.com/watch?v=-qvrRRTBYAkt______________________g______________________s______________________i______________________s______________________2. Items affecting a currency rate:_________________________ law_______________interest rates_______________situation______________indicators: ______ _________

Purchasing power parity (PPP)

A rate of exchange calculated for two currencies so that the amount paid for a range of goods and services in both countries is the same

FOREIGN EXCHANGE RATES

Necessary for foreign trade/economic transaction

Determined by demand and supply (tourism, investment import/export trade in currencies)

A strong kuna is bad for exporters, good for importers

the increased kuna > more expensive exports > fewer sales

> fewer profits

the strong kuna > cheaper import of foreign products > cheaper import of raw materials

cheaper > the production costs lower

> must reduce domestic prices > lower profits

fewer exports more imports bad Balance of Payments

Demand – when we purchase foreign goods/services

Supply – when we export Market forces move the rate up or down to

balance the inflows and outflows of a currency

exchange rates affect output/inflation/foreign trade

governments try to regulate exchange markets to improve foreign

trade

devaluation = decrease the value of a currency in a fixed system

revaluation = increase the value of a currency in a fixed system

appreciation = increase in value over a period of time depreciation = fall in the value over a period of time

Convertible currency

= money of one country that can easily be changed into the money of another country, especially into a strong currency

(the dollar, the euro, the pound, the yen)

Pegged currencies

to peg = to fix against something (gold, another currency)

soft currencies (kuna, pesos…) must bepegged to hard currencies

EXCHANGE RATE SYSTEMS

1. The gold standard2. Freely floating exchange

rates

3. Managed exchange rates

1. THE GOLD STANDARD

the Bretton Woods agreement, 1944 fixed exchange rates defined in terms of gold and the US dollar currencies could only be adjusted by the IMF (devaluated/revaluated) abandoned in 1971 (not enough gold)

2. FLOATING EXCHANGE RATES

determined by supply and demand

reflect a country’s balance of payments and rate of inflation

currency speculation, the value of currencies is constantly fluctuating on foreign exchange markets

3. MANAGED EXCHANGE RATES

governments and central banks influence the level of their currencies when necessary

governments buy or sell in order to increase or

decrease the value of their currencies (use their foreign currency reserves)

http://www.youtube.com/watch?v=itYnQzrTCgE&feature=related

What is the Forex Market? http://www.youtube.com/watch?v=m_muYXqjNAk&feature=related

What happens with changing economies? Give an example with the kuna and the euro.

http://www.youtube.com/watch?v=RK-03L6XVWw&feature=related

ADD APPROPRIATE WORDS TO THESE SENTENCES:revaluation, floating, managed, speculators, convertibility, peg, central

1. Gold ________________ ended in the early 1970s.2. In fact we have ___________ floating exchange

rates, because governments and __________banks sometimes intervene on currency markets.

3. Another verb for fixing exchange rates against something else is to ________ them.

4. Increasing the value of an otherwise fixed exchange rate is called ___________________.

5. A currency can appreciate if lots _______________ buy it.

6. In most western countries there is a system of ___________exchange rates determined by supply and demand.

1. Gold convertibility ended in the early 1970s.2. In fact we have managed floating exchange

rates, because governments and central banks sometimes intervene on currency markets.

3. Another verb for fixing exchange rates against something else is to peg them.

4. Increasing the value of an otherwise fixed exchange rate is called revaluation.

5. A currency can appreciate if lots speculators buy it.

6. In most western countries there is a system of floating exchange rates determined by supply and demand.