Ebook International economics (11/E): Part 2
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Ebook International economics (11/E): Part 2
CHAPTERExchange Rates and the Foreign Exchange Market:An Asset ApproachOver the seven years between mid-2007 and mid-2014, the U.S. dollar's price aga Ebook International economics (11/E): Part 2ainst a basket of major foreign currencies remained roughly constant (despite a temporary' rise in the spring of 2009). In the year and a half between mid-2014 and the start of 2016, however, the dollar's value suddenly rose by a whopping 25 percent, what changes in the U.S. and world economy could Ebook International economics (11/E): Part 2possibly have driven such a dramatic change in the foreign exchange market? In this chapter we will begin our study of the causes and effects of exchaEbook International economics (11/E): Part 2
nge rate changes.The price of one currency in terms of another is called an exchange rate. At 4 P.M. London time on January 19, 2017 you would have neCHAPTERExchange Rates and the Foreign Exchange Market:An Asset ApproachOver the seven years between mid-2007 and mid-2014, the U.S. dollar's price aga Ebook International economics (11/E): Part 2of their strong influence on the current account and other macroeconomic variables, exchange rates are among the most important prices in an open economy.Because an exchange rate, the price of one country's money in terms of another's, is also an asset price, the principles governing the behavior of Ebook International economics (11/E): Part 2 other asset prices also govern the behavior of exchange rates. As you will recall from Chapter 13, the defining characteristic of an asset is that itEbook International economics (11/E): Part 2
is a form of wealth, a way of transferring purchasing power from the present into the future. The price an asset commands today is therefore directlyCHAPTERExchange Rates and the Foreign Exchange Market:An Asset ApproachOver the seven years between mid-2007 and mid-2014, the U.S. dollar's price aga Ebook International economics (11/E): Part 2 closely tied to people's expectations about the future level of that rate. Just as the price of Google stock rises immediately upon favorable news about Google's future prospects, so do exchange rates respond immediately to any news concerning future currency values.Our general goals in this chapte Ebook International economics (11/E): Part 2r are to understand the role of exchange rates in international trade and to understand how exchange rates are determined. To begin, we first learn hoEbook International economics (11/E): Part 2
w exchange rates allow US to compare the prices of different countries' goods and services. Next, we describe the international asset market in which CHAPTERExchange Rates and the Foreign Exchange Market:An Asset ApproachOver the seven years between mid-2007 and mid-2014, the U.S. dollar's price aga Ebook International economics (11/E): Part 2determined in that market. A final section underlines our asset market approach by showing how today's exchange rate responds to changes in the expected future values of exchange rates.LEARNING GOALSAfter reading this chapter, you will be able to:•Relate exchange rate changes to changes in the relat Ebook International economics (11/E): Part 2ive prices of countries' exports.•Describe the structure and functions of the foreign exchange market.•Use exchange rates to calculate and compare retEbook International economics (11/E): Part 2
urns on assets denominated in different currencies.■Apply the interest parity condition to find equilibrium exchange rates.■Find the effects of intereCHAPTERExchange Rates and the Foreign Exchange Market:An Asset ApproachOver the seven years between mid-2007 and mid-2014, the U.S. dollar's price aga Ebook International economics (11/E): Part 2de because they allow US to compare the prices of goods and services produced in different countries. A consumer deciding which of two American cars to buy must compare their dollar prices, for example. $44,500 (for a Lincoln Continental) or $27,000 (for a Ford Taurus). But how IS the same consumer Ebook International economics (11/E): Part 2to compare either of these prices With the 3,500,000 Japanese yen it costs to buy a Nissan Leaf from Japan? To make this comparison, he or she must knEbook International economics (11/E): Part 2
ow the relative price of dollars and yenThe relative prices of currencies can be viewed in real time on the Internet. Exchange rates arc also reportedCHAPTERExchange Rates and the Foreign Exchange Market:An Asset ApproachOver the seven years between mid-2007 and mid-2014, the U.S. dollar's price aga Ebook International economics (11/E): Part 2on January 20. 2017 (these rates correspond to the ones quoted in London at 4 P.M of the previous day. January 19. 2017). An exchange rate can be quoted in two ways: as the price of the foreign currency in terms of dollars (for example. SI .0612 per euro) or as its inverse, the price of dollars in t Ebook International economics (11/E): Part 2erms of the foreign currency (for example. €0.9424 per dollar). The first of these exchange rate quotations (dollars per foreign currency unit) is saiEbook International economics (11/E): Part 2
d to be in direct (or “American") terms: the second (foreign currency units per dollar) is in indirect (or “European") terms.1Households and firms useCHAPTERExchange Rates and the Foreign Exchange Market:An Asset ApproachOver the seven years between mid-2007 and mid-2014, the U.S. dollar's price aga Ebook International economics (11/E): Part 2erms of the same currency, households and firms can compute the relative prices that affect international trade flows.Domestic and Foreign PricesIf we know the exchange rate between two countries' currencies, we can compute the price of one country's exports in terms of the other country's money. Fo Ebook International economics (11/E): Part 2r example, how many dollars would it cost to buy an Edinburgh Woolen Mill sweater costing'The "mid" rales shown arc the average of "bid" and "ask" priEbook International economics (11/E): Part 2
ces lor the U.S. dollar. Generally, a buyer of dollars will pay more (the ask price) than a seller will receive (the bid pnee) due to costs of intermeCHAPTERExchange Rates and the Foreign Exchange Market:An Asset ApproachOver the seven years between mid-2007 and mid-2014, the U.S. dollar's price aga Ebook International economics (11/E): Part 2 to “effective” exchange rate indexes, which are averages of exchange rales against individual trading partner currencies.380 PART THREE ■ Exchange Rates and Open-Economy Macroeconomics50 British pounds (£50)? The answer is found by multiplying the price of the sweater in pounds. 50. by the price of Ebook International economics (11/E): Part 2 a pound in terms of dollars—the dollars exchange rate against the pound. At an exchange rate of SI.50 per pound (expressed in American terms), the doEbook International economics (11/E): Part 2
llar price of the sweater is(1.50$/£) X (£50) = $75.A change in the dollar/pound exchange rate would alter the sweater's dollar price.At an exchange rCHAPTERExchange Rates and the Foreign Exchange Market:An Asset ApproachOver the seven years between mid-2007 and mid-2014, the U.S. dollar's price aga Ebook International economics (11/E): Part 2ate of 51.75 per pound, the sweater's dollar price would be higher, equal to(l.755/£) X (£50) = $87.50.Changes in exchange rales are described as depreciations or appreciations. .A depreciation of the pound against the dollar is a fall in the dollar price of pounds, for example, a change in the exch Ebook International economics (11/E): Part 2ange rate from SI.50 per pound to SI.25 per pound The preceding example shows that all else equal, a depreciation of a country's currency makes its goEbook International economics (11/E): Part 2
ods cheaper for foreigners. A rise in the pounds price in terms of dollars—for example, from $1.50 per pound to SI.75 per pound—is an appreciation of CHAPTERExchange Rates and the Foreign Exchange Market:An Asset ApproachOver the seven years between mid-2007 and mid-2014, the U.S. dollar's price aga Ebook International economics (11/E): Part 2hanges discussed in the example simultaneously alter the prices Britons pay for American goods. At an exchange rate of SI.50 per pound, the pound price of a pair of American designer jeans costing S45 is ($45)/(1.5O$/£) = £50. Ebook International economics (11/E): Part 2CHAPTERExchange Rates and the Foreign Exchange Market:An Asset ApproachOver the seven years between mid-2007 and mid-2014, the U.S. dollar's price agaGọi ngay
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