Exchange rates

Exchange rate is the value of one currency expressed in therms of another currency.

Demand for the currency is anyone who would like to buy a particular currency. e.g people overseas who want to buy exports, foreign visitors, central bank, portfolio investments

Supply of the currency refers to people who posses a specific currency and are willing and able to sell it. e.g people who want to buy imports, travelling from abroad, speculators, central bank

Floating exchange rate system is the value of a currency detremined by the demand and supply forces of the currency in the foregin exchange marekt.

-appreciation sustained increase in the value of one currency expressed by another currency in floating exchange rate system.

depreciation- sustained decrease of the value of curreny expressed in term of another currency by the floating exchange rate.

Any factor that cause increase demand for one currency cause increase of supply of another.

If we want one cuurency (EUR) we need to exchange it from another currency (PLN)

10 Factors that cause a change in demand and supply of a currency:

-FOREGIN DEMAND FOR EXPORT if foregin consumers want to purchase some things they need do first exchange money in order to make a transaction. That cause a higher demand for a foreging currency and supply of their own. Apprication of foregin currency because of demand for it cause a depriciation of domestic one.

-DOMESTIC DEMAND FOR IMPORTS when good is imported in the domestic economy it cause the increased supply of that economy’s currency and demand for oversease currency. Higher demand for imports cause higher supply of domestic currency and its depreciation and apreciation of foregin currency.

-FOREGIN DIRECT INVESTMENTS

-inward foreging direct investments refers to foreging firms (MNCs) making operations in the domestic companies e.g Manulife a Canadian firm making transactions with Hong Kong or Singapur.

-outward foreging direct investments refest to a situation when a domestic company expand their operations with overseas markets.

Inward creates higher demand for a currency leading to its appreciation.

Outward leads to supply of a domestic currency making it depreciated.

PORTFOLIO INVESTMENT purchase of financial investments abroad like stock, shares and bonds of foregin firms and governemnt

-inward portfolio is a situation when foregin investors wants to purchase shares from the US company, they need to supply their own currency to exchange rates market (sell it) and demand the foregin currency of the economy their are investing (USA). This cause a depriciation of foregin currency and apreciation of that we want to invest one.

-outward portfolio

REMITTANCES movement of money when nationals working abroad send them back to their home country. By sending their income to family. They need to supply the currency that they earn money so depriciation and demand their family currency so appreciation.

SPECULATIONS refers to buying or selling the particular currency in order to hope to making a profit from it. In hope of falling a value of certain currency, people decided to sell it (supply) that already lower the value of the currency and make in depreciation.

RELATIVE INFLATION RATES when the inflation in one country is lower in the foregin one. The exports will be less attractive because there are relively higher prices for their products. So imports from domestic country to foregin would be beneficial.

RELATIVE INTEREST RATES higher interest rates will incentive the foregin investors to buy the currency the country would become a more attractive place for short-term portfolio investment (hot money) and foreigners would need to demand the currency in order to invest their money in the country.

RELATIVE GROWTH RATES increase of the specific country GDP will cause a higher inflation because there is also an increase of AD that cause the demand-pull inflation. This kind of nflation can be reduced by monetary policy that involves higher interest rates. Higher interest rates leads to appreciation of domestic currency.

CENTRAL BANK INTERVENTION central bank can restrict the supply of their currency in order to control the money supply. This prevents the manipulating of the currency by foreging investors. example China currency yuan.

Consequences of changes in the exchange rate on economics indicators:

-Depriciation of the currency influence the net exports because exports will be relatively cheaper than imports. As net exports are indicator of Agregate demand it will be the cause of depreciation of currency by demand-pull inflation.

Relies on imports by a particular country can have a negative effect when it comes to depriciation of the currency. Resources could be more expensive and that results in cost-push inflation.

ECONOMIC GROWTH

depreciation of the currency will lead to lower price of exports and higher price of imports. That would cause a change in the net exports that affect the value of economic growth (AD). When particular country relies on imports because they do not have a particular scare resource like oil. The value of imports will exceed the value of exports that will cause a fall in the level of national output.

UNEMPLOYMENT

[[depreciation-lower price of exports - lower unemployment in countries that exports came from[[

[[apperciation- higher price for exports- higher unemployment because exports are less attractive and people lose their jobs[[

CURRENT ACCOUNT BALANCE

LIVING STANDARDS

Fluctuations of the currency have a direct impact on living standards. If the currency is appreciated the value of imports is lower that is why domestic citizens can buy more fruits or other scare resources from foregin countries. That will affect their living standards positively. Also travelling for this citizens would be more attractive because their currency is appreciated and have higher value in therms of other currencies.

FIXED EXCHANGE RATES - situation when central bank buys and sell the foregin exchange rates to ensure that value of their currency remains at fixed rate.

FOREGIN CURRENCY RESERVES or RESERVES ASSETS - the stocks of foregin currency in order to influence the value of its currency

Revaluation is the same as appreciation, when the price of the currency in the fixed exchange rate system increse

Devaluation refers to the depriciation , when the price of the currency in the fixed exchange rate decrease.

Crawling peg is the fixed exchange rate system in which currency have permition to fluctuate within permitted bands. For example Vietnam currency (VND) have permission to fluctuate against US dollars by +/- 3%

Control upward pressure is when we need to sell our currency and buy a foregin one.

managed float exchange rate system

is a system in between the floating and the fixed exchange rate system. It allows the currency to fluctuate based on the forces of supply and demand in the market, but the fluctuation is confined within a set range with an upper and lower limit.

Overvalued currency occurs when the value of currency is above its equilibrium value in the long run.

Undervalue occurs when the value of a currency is below its equilibrium value in the long run.