Transcript Slide 1

Exchange rates
Nominal exchange rates : “The price of one country’s currency in terms of
another”
Example : 1 British pound = 49 baht
Appreciation in currency means there is an increasing in
the exchange rates. The foreign country finds that other
country’s currency becomes more expensive to buy.
Depreciation in currency means there is a decreasing in
exchange rates. The foreign country finds that other
country’s currency becomes cheaper to buy.
Trade- weighted exchange rates is the way to evaluate the significant of the
effects resulting from a changing in exchange rates by weighting its value
according to the amount of trade carried out with each trading partners. For
example, if the main trading partner is the UK then the action of the
currency against pound is likely to be the most important movement.
Real exchange rates: “The value of one country’s products in term of
another country’s In other words it is the nominal exchange rate that is
adjusted by the rate of inflation.”
For example: UK has 10% inflation
Thailand has 5% inflation
Then 10-5= 5% this means the UK’s currency is higher than the nominal value by
5% without any change in nominal exchange rates.
(higher prices mean an appreciation of the real exchange rate, other things equal)
Effect of changing exchange rate on the economy
Strong currency – lower import prices, help to control the rate of
inflation, improve the terms of trade ( export become more
expensive)
-Rising in import lead to trade deficits (more imports than exports)
which causes the exporters to lose price competitiveness, sell less,
less profit, more unemployment and less economic growth
For a weak currency, a reverse effect occur.
Determination of
Exchange Rates
Floating Exchange Rate
• Determined by the private market through supply
and demand.
•Government controls the quantity of the currency by
selling and buying assets e.g. foreign money and gold.
•self-correcting
(low demand– depreciation– cheap – more demand)
(low supply– appreciation – expensive – high supply)
•Uncertainty for investors
Fixed Exchange Rates
• Set by the government or the central bank
•No fluctuations
•Provide certainty for investors
•Low rate of inflation
•not necessary to keep high levels of
reserves
e.g. China, since 2010 the rate fluctuated
Managed Float Exchange Rate
•Preferred for most of the countries
• The value of the currency is determinate by the
market forces and where the government can
intervene if needed.
•balance o payment deficit can be automatically
adjusted by market system
•Interest rates are determined by the government
E.g. Thailand
Factors underlying fluctuations
in exchange rates
Exchange rate will increase when
•Inflation is low
•Interest rate for foreign borrowing is high
•There is a current account deficit(supply more
of its own currency, excess demand for foreign
currencies)
•Terms of trade improve
•Political Stability and Economic
Performance(for investment)