2. Effect of exchange rates on key macroeconomic indicators

3. CURRENCY APPRECIATION
REVISION
CURRENCY APPRECIATION
GOOD or BAD ?

4. REVISION
CURRENCY DEPRECIATION

5. Can you explain this diagram?
APPRECIATION
Can you explain this diagram?

6. APPRECIATION CAUSE??? Increase in demand for AUD (shift from D to D1)
Value of AUD (P) has increased (US$ 0.50 to $0.60)
Quantity traded (Q) has increased (Q to Q1)
CAUSE???
Increase in demand for Australian exports
eg coal, aluminum, beef lamb

7. DEPRECIATION
How is it different to the previous diagram?

8. DEPRECIATION CAUSES??? Decrease in demand for AUD (D to D1)
Depreciation in the value of the AUD (to US$40)
Quantity of AUD decreased (Q to Q1)
CAUSES???
Slow down in global economic activity
THEREFORE,
decrease in demand for Aus exports
Investors lack confidence in Aus economy

9. REMEMBER APPRECIATION Foreign goods (imports) are cheap
Domestic goods (exports) are expensive
DEPRECIATION
Imports are expensive
Exports are cheap

10. LEARNING OBJECTIVES
Analyse the effect of changes (up and down) in the exchange rate on the key macro economic indicators by:
- Analysing effect
- Draw up a poster
- Share ideas
- Peer Assess

11. MACROECONOMIC INDICATORS
Low Inflation (measured by CPI or real GDP)
High Economic Growth (GDP)
Low Unemployment (unemployment rate)
Trade Balance (X-M)reflected in BOP)
Let’s look at these!

12. GROUP TASK TASK Evaluate the effects of a change in exchange rate on:
Inflation
Economic Growth
Unemployment
Trade Balance
Interesting fact
GROUP TASK
4 GROUPS
Discuss using diagrams
Draw up a poster
Provide feedback to class
Evaluate (Rubric)

13. INFLATION CURRENCY DEPRECIATION
Makes exports cheaper and imports expensive
BAD?
If firms rely on imported resources (FOPs)
AS moves to the left
GOOD?
For exports
AD moves to right …
INFLATION (cost push & demand pull) increases

14. INFLATION

15. ECONOMIC GROWTH Related to net exports (affect AD and AS)
CURRENCY DEPRECIATION
Increase in net exports, increase in AD and increase in real GDP
THEREFORE decrease in unemployment
BUT may be short term because of inflationary pressure
LT = increase (X) =increase (I) + real GDP
Also decrease in unemployment and inflation possible

16. ECONOMIC GROWTH

17. UNEMPLOYMENT CURRENCY DEPRECIATION
Increase in net exports = Increase AD
Unemployment decreases as real GDP increases
BUT LT …..may have inflationary pressure

18. UNEMPLOYMENT AS DEPRECIATION domestic firms will
benefit from increased AD AD1
sales Real GDP
This may lead to job creation and lower unemployment, especially in exporting industries.
The increase in X-M will help increase Aggregate Demand (AD) and therefore lead to higher economic growth

19. TRADE BALANCE CURRENCY DEPRECIATION
= increase exports decrease imports
THERFORE,
Decrease trade deficit
CURRENCY APPRECIATION
Worsens BOT (imports increase and exports decrease)
THEREFORE,
Decrease in income, increase in unemployment

20. What can we conclude?

21. What are the main functions of a foreign exchange market?
QUESTION
What are the main functions of a foreign exchange market?

22. Functions of Foreign Exchange Markets

23. FUNCTIONS OF F/E MARKET
TRANSFER
Conversion of one currency to another
Transfer purchasing power
Done through credit instruments:
- foreign transfers
- bank drafts
- foreign bills

24. FUNCTIONS OF F/E MARKETS
CREDIT
Allow the provision of credit ( Nationally and internationally)
Use:
- Bills of exchange
- are used in international payments,
(a credit for about 3 months, till their maturity, is required).
The foreign exchange market carries out payments internationally by clearing debts in both directions

25. FUNCTIONS OF F/E MARKETS
HEDGING
Safeguarding against changes in exchange rates (losses or gains)
USE
- forward contracts
(can buy or sell FE at a fixed future date at a given price)

26. FORWARD CONTRACTS
A forward contract is a contract to buy or sell foreign exchange against another currency at some fixed date in the future at a price agreed upon now.
No money passes at the time of the contract. But the contract makes it possible to ignore any likely changes in exchange rate.