Transcript Intro-to-exchange-ra..

Starter: Recap… Macro effects of a
currency depreciation
When the pound depreciates against the US dollar
It makes UK import prices
RISE
It makes UK export prices
FALL
Changes in import and export prices will affect demand
Import volumes will CONTRACT
Export volumes will EXPAND
This will have an effect on a number of key economic indicators
Domestic production
Trade deficit
Domestic employment
Exchange Rates
Currencies matter! Changes in the external value of one currency
against another can have important effects on variables such as the
volume of exports and imports, domestic production, profits and jobs,
the rate of inflation and international competitiveness. Movements in a
currency affect both the demand and supply-side of economies deeply
integrated in the world economy and open to large-scale trade and
capital flows.
Different Types of Exchange Rate Systems
1 Free-floating exchange rate
2 Managed floating
3 Fixed exchange rate (fully fixed or semi-fixed)
4 Monetary Union with other countries
TASK…
TASK
• Write a news article
explaining what has
happened to the £, why
this has happened and
what the impact is
going to be
Bilateral exchange rate
• The rate at which one currency can be converted into another
Floating
• Under a system of floating exchange rates, demand and supply
determine the rate at which one currency exchanges for another.
• What factors impact the supply and demand for a currency?
• When making comparisons between countries which use
different currencies it is necessary to convert values, such as
national income (GDP), to a common currency.
This can be done it two ways:
1.Using market exchanges rates, such as $1 = ¥200, or:
2.Using purchasing power parities (PPPs)
Purchasing power parity
• The purchasing power of a currency refers to the quantity of the
currency needed to purchase a given unit of a good, or common
basket of goods and services.
• Purchasing power is clearly determined by the relative cost of living
and inflation rates in different countries.
• Purchasing power parity means equalising the purchasing power of
two currencies by taking into account these cost of living and inflation
differences.
Purchasing power parity
The Big Mac Index
• This index, devised by The Economist, calculates how many units of a
local currency are needed to purchase a Big Mac. Exchange rates can
then be adjusted according to how much local currency is required.
• http://www.economist.com/content/big-mac-index
Exam Practice
• With reference to Extract 1, analyse two reasons why the value of the
real, Brazil’s currency, has appreciated. (8)