Foreign Exchange (Forex)
·
The buying and selling of
currency.
- Ex. In order to purchase souvenirs in France, it
is first necessary for Americans to sell (supply) their dollars and buy Euros.
- Any transaction that occurs in the balance of payments
necessitates foreign exchange.
- The exchange rate (e) is determined in the foreign
currency markets.
Changes in exchange rates
- Exchange rates (e) are a function of the supply
and demand for currency.
- An increase in the supply of a currency will
decrease the exchange rate of a currency.
- A decrease in supply of a currency will increase
the exchange rate of a currency.
- An increase in demand for a currency will increase
the exchange rate of a currency.
- A decrease
in demand for a currency will decrease the exchange rate of a currency
Appreciation
and depreciation
·
Appreciation of a currency occurs when
the exchange rate of that currency increases.
·
Depreciation of a currency occurs when
the exchange rate of that currency decreases (e decreases)
Note: the more you supply, value depreciate. The
more you demand value appreciates.
Exchange rates determinants
1. Consumer
tastes (buyers taste)
2. Relative
income
3. Relative
price level
4. Speculation
Exports
and imports
The exchange rate is a determinant of both exports
and imports.
·
Appreciation of the dollar causes
American goods to be relatively more expensive and foreign goods to be
relatively cheaper, thus reducing exports and increasing imports.
·
Depreciation of the dollar causes American
goods to be relatively cheaper and foreign goods to be relatively more
expensive, thus increasing exports and reducing imports.
As two currencies trade:
1. One
supply line will change; the other demand line will change.
2. They
will move in the same direction.
3. One
currency will appreciate, the other will depreciate.
Note: when supply decreases then dollar
appreciates. When supply increases them value of dollar depreciates.
Flexible
rate
Based on the supply and
demand of that currency versus the other currency. It is very sensitive to the
business cycle and it provides options for investment.
Fixed
rates
It is based on a countries
willingness to distribute currency and to control the amount.
Your notes are very well separated, descriptive and clear to understand. The only thing I would really like to add is perhaps an example over appreciation and depreciation, such as: Tourists from France spending money in America would result in an appreciation of the dollar and deprecation of the franc.
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