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AGRICULTURAL ECONOMICS
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Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Exchange Rates and
Agricultural Trade
Chapter 17
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Discussion Topics
Exchange rates and the foreign exchange market
The balance of paymentsThe international monetary systemExchange rate determinationExchange rates and U.S. agricultural
tradeConsiderations for policy coordination
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Exchange Rate DefinedThe exchange rate is the number of units of a foreign currency required to obtain one unit of a domestic currency.
The reciprocal of this rate expresses the number of units of a domestic currency required to obtain one unit of a foreign currency.
These rates can be thought of as the value of the domestic currency relative to a foreign currency (i.e., the value of the $ relative to the £ or ¥).
Page 335
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 337
When the value of thedollar appreciates invalue, the exchangerate index increases.A depreciation of thevalue of a dollar causesthe index to decline.
When the value of thedollar appreciates invalue, the exchangerate index increases.A depreciation of thevalue of a dollar causesthe index to decline.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 337
The line “Canadiandollar (in U.S. dollars)”of 1.305 means that aCanadian dollar exchangesfor almost $1.31 in U.S.currency. One BritishPound is worth about $1.82 in U.S. currency.
The line “Canadiandollar (in U.S. dollars)”of 1.305 means that aCanadian dollar exchangesfor almost $1.31 in U.S.currency. One BritishPound is worth about $1.82 in U.S. currency.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Balance of PaymentsThe balance of payments (BOP) is made up of threemain accounts:
Current account: composed of merchandise tradeaccount (exports less imports), services trade account (income from international capital investments, tourism,transportation and insurance) and transfer payments(gifts and foreign aid).
Private capital account: summarizes transactions in realand financial assets and foreign activities of U.S. banks.
Official settlements account: summarizes net changes inofficial holdings of international reserve assets.
Page 338
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 341
The U.S. began running a current account deficit in the mid-1980sas a result of a growing merchandise trade deficit. Inflows of private capital were used to pay for this deficit.
The U.S. began running a current account deficit in the mid-1980sas a result of a growing merchandise trade deficit. Inflows of private capital were used to pay for this deficit.
Private capital accountPrivate capital account
Current accountCurrent account
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 345
Only 25 countries, including the U.S., Japan and Canada allow theircurrencies to float independently. Most countries peg or “fix” theirCurrency relative to another currency, basket of currencies or SDRs.
Only 25 countries, including the U.S., Japan and Canada allow theircurrencies to float independently. Most countries peg or “fix” theirCurrency relative to another currency, basket of currencies or SDRs.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 347
Rates are determined byforces affecting the supplyand demand for currencieson the foreign exchangemarket.
Rates are determined byforces affecting the supplyand demand for currencieson the foreign exchangemarket.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 348
An increase in the demand for dollars as U.S. interestrates rise, indicating here that it takes 4 euros to buya dollar rather than 3 euros.
An increase in the demand for dollars as U.S. interestrates rise, indicating here that it takes 4 euros to buya dollar rather than 3 euros.
E 5
E 4
E 3
E 2
E 1Exc
han
ge
rate
(Eu
ros/
do
llars
)
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 349
A trade deficit causes an increase in the supply of dollarson currency markets, thereby weakening the dollar andlowering the exchange rate from 3 euros per dollar to 2 euros
A trade deficit causes an increase in the supply of dollarson currency markets, thereby weakening the dollar andlowering the exchange rate from 3 euros per dollar to 2 euros
Exc
han
ge
rate
(Eu
ros/
do
llars
)
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 351
When the dollar rises, exportsfall, and when the dollardeclines, exports rise.
When the dollar rises, exportsfall, and when the dollardeclines, exports rise.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 352
An increase in the value of the dollar makesOur exports more expensive to client nations.
An increase in the value of the dollar makesOur exports more expensive to client nations.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
SummaryExchange rates have an impact on U.S. agricultural trade.The value of foreign currencies is determined in the
foreign exchange market.Balance of payments is a link between international trade,
capital flows and exchange rates.The international monetary system is called a managed
float, where rates fluctuate within limits controlled by the International Monetary Fund or IMF.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Chapter 18 discusses the reasons why nations trade….