UNIT 6
MACRO
International
Trade and
Finance
Exchange Rates:
In this Module, you will learn to:
• Define the exchange rate, foreign exchange market,
currency appreciation, and currency depreciation
• Explain how currencies are valued relative to one another
• Calculate the value of one currency relative to another
• Explain the concept of purchasing power parity
• Explain the difference between nominal and real exchange
rates
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Exchange Rates:
Understanding Exchange Rates
Currencies are traded in
the foreign exchange
market.
Exchange rates are the
prices at which currencies
trade.
Table 6.2-1 shows When a currency When a currency
exchange rates among becomes more becomes less
the world’s three most valuable in terms of valuable in terms of
important currencies. other currencies, it other currencies, it
appreciates. depreciates.
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Exchange Rates:
Gainers and Losers from Currency Depreciation
Any change to the Table 6.2-2 lists examples of people who
exchange rate will create gain and lose from the depreciation of the
winners and losers. U.S. Dollar
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Exchange Rates:
Gainers and Losers from Currency Depreciation
The purchasing power
parity between two Purchasing power parity is usually
countries’ currencies is the calculated by estimating the cost of
nominal exchange rate at buying broad market baskets containing
which a given basket of many goods and services—everything
goods and services would from automobiles and groceries to
cost the same amount in housing and telephone calls.
each country.
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Exchange Rates:
Purchasing Power Parity
Figure 6.2-1 shows the
As
purchasing
you can see,
powertheparity
purchasing
between the power
Unitedparity
changed
States andvery
Canada—the
little from
1990–2020,
exchange ratestaying
at which
neara
C$1.20
basket of
pergoods
US$1—while
and
the
services
nominal
wouldexchange
have cost
rate
the same
fluctuated
amountwidely.
in both
countries
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Exchange Rates:
Inflation and Real Exchange Rates
Real exchange rates are exchange rates
The exchange rates listed at adjusted for international differences in
currency exchange booths aggregate price levels.
are nominal exchange
rates. The current account
responds only to changes in
real exchange rates, which For example, the real exchange rate of pesos
have been adjusted for to dollars is the nominal exchange rate
differing levels of inflation. multiplied by the difference in aggregate price
levels.
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Exchange Rates:
Inflation and Real Exchange Rates
Between 1990 and 2013,
the price of a dollar in
Mexican pesos increased
dramatically. But because
Mexico had higher inflation
than the U.S., the real
exchange rate ended up
roughly where it started.
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Exchange Rates:
Walkthrough: Free Response Question #1
1. Give an example of 4 groups that have Korean Won and want U.S. dollars and 4 groups that have U.S. dollars and want
Korean Won. (8 points)
1 point: Korean tourists traveling to the United 1 point: U.S. tourists traveling to Korea
States
1 point: U.S. importers of Korean goods
1 point: Korean importers of U.S. goods
1 point: Korean exporters to the United States
1 point: U.S. exporters to Korea
1 point: U.S. investors who want to invest in Korea
1 point: Korean investors who want to invest in the
U.S.
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