Lecture 8: Exchange Rate Determinants

Vocabulary flashcards for Exchange Rate Determinants lecture.

Law of One Price

In the absence of trade frictions and under free competition and price flexibility, identical goods sold in different locations must sell for the same price when expressed in a common currency.

Purchasing Power Parity (PPP)

The macro counterpart to the law of one price, stated for a basket of goods instead of a single good.

Relative Purchasing Power Parity

The rate of change of the exchange rate over time will equal the rate of change in the price ratio.

Asset Approach to Exchange Rates

Currencies are assets; the price of the asset is the spot exchange rate.

Spot Exchange Rate

The price of one unit of foreign exchange.

Uncovered Interest Parity (UIP)

The fundamental equation of the asset approach to exchange rates: (1 + i$) = (1 + ie) ∗ Ee $/e / E$/e