6.4 Exchange Rates

Exchange rate

value of 1 currency compared to another

Appreciation on ER

incr currency value compared to another

Depreciation on ER

decr currency value compared to another

Impacts on BoP
Appreciation of ER
>  ↓D of __, ↑D for __ (EXPORTS/IMPORTS)
> __ (better/worse) BoP

exports, imports, worse

Impacts on BoP
Depreciation of ER
>  ↓D of __, ↑D for __ (EXPORTS/IMPORTS)
> __ (better/worse) BoP

imports, exports, better

Determinants of ER
via D/S of currency:
> r__ i__ r__
>> ↑i.r. = ↑_ of __ (ppl want ↑r__ on savings) = a__
> D for i__
>> ↑S of importing country’s currency = d__
> D for e__
>> = ↑D for country’s currency = a__
>> bc of dev. of s__ goods, marketing, change in price of s__

relative int rates, D, currency, returns, appreciation, imports, depreciation, exports, appreciation, superior, subs

Determinants of ER
via D/S of currency:
> f__ i__
>> MNCs need to buy fore. c__ for premises, m__, l__ etc
>> = a__ of __ country’s currency; d__ of MNC’s home country cur.
> s__
>> predict currency will a__ = buy n__, sell high = a__
>> predict currency will d__ = sell n__ to avoid loss = d__

foreign investment, currency, mats, labour, appreciation, host, depreciation, speculation, appreciate, now, appreciation, depreciate, now, depreciation

Determinants of ER
via D/S of currency:
> c__ in i__ r__
>> do__ i__ = expensive e__ = ↓D = d__
> g__ intervention
>> e.g. ↑D for NZ goods = ↑NZD value, so Reserve Bank sells reserves to exchange = ↑S = ↓NZD value
> global t__ patterns

change, inflation rates, domestic inflation, exports, depreciation, govt, trading

Coping w/ High Exchange Rates
Ø  ↓p__, accept ↓profit margin to maintain D
Ø  Find c__ s__ of mats
Ø  ↑e__ = maintain p__ at lower price lvls
Ø  Focus on __-price factors e.g. q__, brand i__, social respon
Ø  Focus on goods w/ i__ D

prices, cheaper suppliers, efficiency, profits, non, quality, img, inelastic

Types of ER
1. fl__: price determined by _ & S f__ for c__ only; NO g__ intervention

floating, D, forces, currency, govt

Types of ER
2. fi__: c__ value fixed in r__ to a__ currency (not allowed to f__)

fixed, currency, relation, anchor, fluctuate

Types of ER
3. m__: rate influenced by g__ via c__ b__ around p__ rate

managed, govt, central bank, preferred