10.1: International Exchange

 Money: a medium of exchange used by a society  Money can store value and act as a unit for accounting.  Over time money has made a transition from silver or gold coins that had real value to notes and coins that represent value because they are backed by gold or something else of value.  Today, most money acts as a means of exchange without any real value  Money has value only because the people who use it believe in it  Currency is the term used for money in international market. Gold & Silver = Real Value US Dollars & Coins = Assumed Value

 International Market Money is categorized into two types of currencies: 1. Hard Currency: Has the confidence of international traders  Comes from economically and politically stable countries.  Ex: the British pound, The Euro, US Dollar 2. Soft Currency: Not acceptable for international exchange  Unrealistic exchange rates  Economic or political instability within a country.  Ex: Mexican peso

 The law of supply and demand attempts to explain how changes in the demand and quantity of goods sold in competitive markets impact a price.  Low supply, high demand = High Price  High supply, low demand=Low Price  Demand:The quantity of a good or service that consumers are willing and able to buy at a given price.  Supply: The quantity that producers are willing to offer at a given price 

Price Demand What Customers are willing to that price Supply What suppliers are willing to that price $5010 Units60 Units $4020 Units50 Units $3030 Units41 Units $2038 Units28 Units $1052 Units10 Units Qty = Units Produced

 The changes in demand and supply are based on the:  Nature of the product  Nature of competition  Needs of buyers and sellers  The law of supply and demand works for most goods and services and also holds true for the global demand for currency.  Instead of changes in price, the exchange rate between countries will shift

 Most currency exchange rates are based on the law of supply and demand  Exchange Rate: Ratio of how much one currency is worth in exchange for another

 The ratio of how much one currency is worth in terms of another currency  Also referred as foreign-exchange rate.  Example: $1 US = 42 Indian Rupees or  1 Euro = $1.36 US.  This means that on a given day 1 US dollar can buy 42 Rupees; or 1 Euro can buy $1.36 dollars  Floating currency exchange rates are based on law of Supply & Demand  Determined by the demand for a currency and its supply  Hard currencies usually float  Pegged Currency: A set rate to another currency

1. Transactional Demand: The amount of economic activity in a country creates transactions—the more economic activity, the more transactions, therefore greater demand for currency 2. Economic Confidence: If international investors lose confidence in an economy, they may try to sell the currency holdings resulting in to increased supply of the currency and therefore decreased value of the currency. 3. Money Supply: Interest rates effect the bank lending activities. When banks drop interest rates, more money is borrowed resulting into increased economic activities and supply of money. However too low of a interest rate causes inflation and that makes the currency less desirable by foreign investors. 4. Speculative Demand: Some international investors use forward events(ex: elections) to speculate on future currency rates.