The Global Economy: Currencies and Exchange Rates

why do ERs change?

1. changing demand for a country's products and thus its currency 2. changing prices due to inflation for example 3. interest rates - people invest where they can get the most interest on their savings, so this attracts more foreign capital which thus grows the economy, in return increasing the ER

why are currencies different?

allows govt to keep its economy separate from those of other nations -- one nation controlling the printing/management of one currency for whole world controls the world's economy makes it easier for a country to manage its own economy -- more control over its own economy

how do nation choose currency?

create their own - dollar or peso use another nation's currency - panama uses US dollar adopt a common currency among nations - European union members from west europe with the euro

what is currency?

currency is the system of money created by a nation or region - has changing values - had different denominations (ex: we use bills and different types of coins, they are set up to be added to equal one another) - can be traded for other currencies

what factors influence the international demand for currency?

domestic inflation and employment rates country's GDP strength and stability of the government nation's involvement in war more successful nation = increased international demand for the nation's currency, meaning that more of the g/s priced with that currency are sought after

how do the values of currencies differ?

each currency has a changing value relative to others (due to factors like inflation) - known as exchange rate

summary of rising value and falling value on ER

falling value: the dollar is worth less, so the ER for foreigners increases because their currency can get them more US dollars rising value: dollar worth more, so the ER for us increases because our dollar can get us more foreign currency

exchange rate tables

show the rates at which currencies are currently being traded - display rates in relation to a single reference currency - data is displayed electronically in real time (changes constantly with ER) - so shows you how much of several currencies you can get with one unit of one reference currency top right corner tells you the reference currency left column has the exchanged currencies

value of US dollar vs Canadian dollar

so as the US dollar goes up, then we have more US dollars per canadian dollar - once we greater than 1 US dollar per canadian dollar, that means that the canadian dollar has greater value

exchange rate

the difference in value between one nation's money and another's

effects of a weakened currency

this is when value of US dollar relative to foreign currencies falls (inflation) - trades less favorably for us cons - foreign companies that export to the US receive fewer dollars for their goods (their currency gives them less US dollars due to decreased value) - imported goods are more expensive for Americans (less likely to import) pros - foreigners more likely to import american goods bc they seem cheaper - foreigners come to US more

how do exchange rates work?

we exchange currency for tourism, trade (import and export), and investment purposes (buy stock or factory in foreign company) currency is like a commodity: it is bought and sold. so the prices fluctuate with supply and demand which can change from day to day - so exchange rates can change daily - some nations have fixed exchange rates - graphically: the eq price point is the exchange rate (just a standard that we use to compare nations), so if demand increased and the demand curve shifted right, the ER would increase as well so, the demand/supply for currency (that is, the goods/services that are bought with a specific currency) is what will increase or decrease the ER

effects of a stronger currency

when VALUE (not price) of US dollar rises (known as a stronger dollar), it trades more favorably against other currencies -- because our currency can now get us more in another country's currency positive: - prices of foreign goods decline (more likely to import) - travelling to a foreign country is cheaper negative: - american-made goods are more expensive for foreigners, so less exports - foreigners less likely to come to US but note that the increased value of US dollar benefits us at home because less money is worth more, but does not benefit foreigners because for them same money is worth less US

devaluation and revaluation

when nations set their own value of currency without allowing supply and demand to dictate -- to manipulate exports/imports to meet their needs deval: sets the value of their currency lower - encourages exports - discourages imports - this is inflation: the prices rise (so value decreases), so same amt of money as before gets you less reval: sets value of currency higher - encourages imports - discourages exports remember that ER is relative based on diff in 2 values (greater prices does NOT mean greater value): so if less gets you more, then less has greater value (if you had equal amts of both, then the less would have a greater value; ER just tells you how much more it actually is worth)