Disclaimer The views expressed are those of the presenters and do not necessarily reflect those of the Federal Reserve Bank of Dallas or the Federal Reserve System TEKS Economics The student understands the reasons for international trade and its importance to the United States and the global e ID: 1027219
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1. Session 8Exchange RatesDisclaimer: The views expressed are those of the presenters and do not necessarily reflect those of the Federal Reserve Bank of Dallas or the Federal Reserve System.
2. TEKSEconomics. The student understands the reasons for international trade and its importance to the United States and the global economy. The student is expected to:(C) analyze the impact of U.S. imports and exports on the United States and its trading partners.Economics. The student understands the issues of free trade and the effects of trade barriers. The student is expected to:(C) analyze the effects of changes in exchange rates on imports and exports.
3. Teaching the TermsExchange ratesAppreciateDepreciatePurchasing power parityNominal valuesReal values
4. Foreign Exchange MarketDerived demandCurrencies are bought and soldLargest financial market in the worldOperates 24 hours a day
5. Nominal Exchange RatesRate at which the currency of one country can be exchanged for the currency of another countryDepreciate = Weaken = Lose valueAppreciate = Strengthen = Gain value
6. Exchange RatesOne exchange rate is the reciprocal of another exchange rateIf €1 = $2.00, then $1 = €0.50As the exchange rate fluctuates, the value (or strength) of each currency is affectedWhen one currency strengthens, the other weakens
7. Weakening Dollar / Strengthening Euro
8. Weakening Euro / Strengthening Dollar
9. Exchange Rates in the Short RunModel with supply and demand graphQuantity of dollarsPrice of a dollar in a foreign currencyFactors affecting supply of dollarsAmerican purchase of goods and services produced abroadAmerican investment in foreign assetsFactors affecting demand for dollarsForeign purchase of American goods and servicesForeign investment in American assets
10. Number of Euros per DollarQuantity of Dollars TradedS1D11S2212
11. Number of Euros per DollarQuantity of Dollars TradedS1D11D2212
12. A stronger U.S. dollar means …
13. A weaker U.S. dollar means …
14. Exchange Rates in the Long RunLaw of one price Identical items should sell for the same pricePurchasing power parity (PPP) One unit of domestic currency will buy the same basket of goods anywhere in the worldPPP implies that the real exchange rate will always be 1
15. Exchange Rates in the Long RunReal exchange rate Rate at which the goods and services of one country can be exchanged for the goods and services of another countryReal exchange rate = Dollar price of domestic goodsDollar price of foreign goods
16. Questions?