Warm Up What do exchange rates tell us?

Thursday, October 8, 2015 Objective: Students will be able to analyze the effects of exchange rates on trade. Purpose: Most countries have their own currencies.

What are Exchange Rates? Exchange rate: the value of a nation’s currency in relation to another nation’s currency Example: $1 US Dollar =$13.49 Mexican Pesos Purpose: to allow you to convert prices in one currency to prices in another currency

Current Exchange Rates

When a Currency Changes Value Appreciation of currency: an increase in the value of a currency When a currency appreciates, it becomes “stronger” Depreciation of currency: a decrease in the value of a currency When a currency depreciates, it becomes “weaker”

Effect of Exchange Rates on Trade Effects of Appreciating Currency Effects of Depreciating Currency Value of currency rises, making goods produced in that country more expensive Exports: Costs of exports rises for foreign buyers, causing sales in other countries to decrease Imports: Cost of imports falls, causing sales of imports to increase Value of currency falls, making goods produced in that country less expensive Exports: Cost of exports falls for foreign buyers, causing sales in other countries to increase Imports: Cost of imports rises, causing sales of imports to decrease

Fixed Exchange Rate A currency system in which governments try to keep the values of their currencies constant against one another. In a typical fixed exchange-rate system, one country is the stable currency and the other countries try to “fix” or “peg” their exchange rates to the currency of this central country. Exchange rates rely on supply and demand. Was used when countries were on the gold standard

Flexible Exchange Rate System the exchange rate is determined by supply and demand (demand is determined by the demand for products from a specific currency) accounts for the day-to-day changes in currency values most nations use this system to determine exchange rates