Trade Surplus Trade Deficit Foreign Exchange Markets

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United States Businesses Exporting goods to Japan want dollars not Yen Japanese Businesses Exporting goods to U.S. want Yen not dollars Foreign Exchange Market Japanese importers supply their yen in exchange for dollars in the Foreign Exchange Market. And U.S. importers exchange their dollars for yen.

$1 will buy EXCHANGE RATES:.63 British pounds Mexican pesos.93 European euros 119 Japanese yen 1,237 South Korean won Indian rupee 1.48 Canadian dollars 1.36 Swiss francs 8.54 Swedish krona Foreign Exchange Market – a market in which various national currencies are exchanged for one another.

It is important to remember the following about foreign exchange markets: They are competitive markets characterized by a large number of buyers and sellers. They enable consumers in one country to translate prices of foreign goods into units of their own currency.

Dollar Price of Yen $.01 Quantity of yen SySySySy DyDyDyDy The equilibrium rate is the rate at which currency of one nation can be exchanged for the currency of another nation. Q e (1) At this rate, $1 will buy 100

AS AD2 AD 1 Y R Y * U.S. Economy What might cause this exchange rate to change? Suppose incomes rise in the U.S. due to an economic boom. Consumers will be willing and able to buy more U.S. and Japanese goods.

Quantity of Quantity of DyDyDyDy SySySySy $.05 $.01 D y2 D Price of Price of An increase in U.S. demand for Japanese goods will increase the demand for yen and raise the dollar price for yen (how much each yen cost).

Quantity of A Quantity of A D1D1D1D1 S $.05 $.01 D2D2D2D2 D Price of Price of When the dollar price of yen increases, we say that the dollar has depreciated (it takes more dollars to buy a single yen). Thus the international value of the dollar has declined.

AS AD1 AD2 Y R Y * Japanese Economy Since the value of the yen has increased, the price of Japanese goods will become more expensive to Americans. The result will be that American consumers will buy less Japanese goods and more American goods. This will cause a recessionary trend in the Japanese economy.

Quantity of Quantity of DyDyDyDy SySySySy $.01 $. 005 D y2 A Price of Price of A decrease in the dollar price of yen is called appreciation of the dollar. The international value of the dollar has increased. Since it takes fewer dollars to buy a yen the price of Japanese goods become cheaper to Americans.

AS AD2 AD1 Y R Y* Japanese Economy PL Americans will buy more Japanese goods and fewer U.S. goods, leading to an economic boom in Japan.

Equals Equals Equals Dollar price of foreign currency increases [$1 to $1.50] International value of dollar falls (dollar depreciates) Exports increase Imports decrease Dollar price of foreign currency decreases [$1 to.50] International value of dollar rises (dollar appreciates) Imports increase Exports decrease

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