Exchange Rate Notes
Exchange Rate Notes
Class Notes
Exchange rate can be expressed in two ways, for example:
£1 = 1.52 CHF
1 CHF = £0.66
Foreign Exchange (Forex) Market
Many currencies float freely on the free market.
However, this is a relatively new phenomenon. After the war, major currencies were pegged to each other under the Bretton woods agreement. They were backed up by gold reserves to keep them at this level.
Prior to the war they were often pegged to the price of Gold.
Prior to the Euro (1990s), many European currencies were pegged to Denmark. Some e.g. Danish Krona (and effectively the CHF are pegged to the Euro).
Perfect competition?
Many Sellers, homogeneous, perfect information, global, profit is low.
Many actors interact with currency dealers, from individuals, to central banks, investment banks, remittance companies to speculators.
At the retail end, commission is charged and rates for buying and selling are different.
Large amounts of foreign exchange are traded by speculators which can cause volatility. They may have more power than central banks.
Devaluation: example, Black Wednesday
Appreciation
Depreciation
Advantages
Advantages
Less Expensive Imports:
M are cheaper
The increased value of the currency means that buying imported goods is now relatively less expensive than before. With increased buying power in these terms, a country can enjoy cheaper foreign consumer goods and capital goods. This can help those firms that import raw materials and capital goods, lowering their costs of production. At the same time, increased consumer goods can improve the standard of living and round out the economy in helpful ways. For developing countries, the ability to buy cheaper capital goods and energy resources could be a significant advantage. Where a country relies heavily on imports of any kind, an appreciation of the exchange rate can put downward pressure on inflation.
Expansion of domestic industries:
X cheaper, X led growth
Class Notes
Exchange rate can be expressed in two ways, for example:
£1 = 1.52 CHF
1 CHF = £0.66
Foreign Exchange (Forex) Market
Many currencies float freely on the free market.
However, this is a relatively new phenomenon. After the war, major currencies were pegged to each other under the Bretton woods agreement. They were backed up by gold reserves to keep them at this level.
Prior to the war they were often pegged to the price of Gold.
Prior to the Euro (1990s), many European currencies were pegged to Denmark. Some e.g. Danish Krona (and effectively the CHF are pegged to the Euro).
Perfect competition?
Many Sellers, homogeneous, perfect information, global, profit is low.
Many actors interact with currency dealers, from individuals, to central banks, investment banks, remittance companies to speculators.
At the retail end, commission is charged and rates for buying and selling are different.
Large amounts of foreign exchange are traded by speculators which can cause volatility. They may have more power than central banks.
Devaluation: example, Black Wednesday
Appreciation
Depreciation
Advantages
Advantages
Less Expensive Imports:
M are cheaper
The increased value of the currency means that buying imported goods is now relatively less expensive than before. With increased buying power in these terms, a country can enjoy cheaper foreign consumer goods and capital goods. This can help those firms that import raw materials and capital goods, lowering their costs of production. At the same time, increased consumer goods can improve the standard of living and round out the economy in helpful ways. For developing countries, the ability to buy cheaper capital goods and energy resources could be a significant advantage. Where a country relies heavily on imports of any kind, an appreciation of the exchange rate can put downward pressure on inflation.
Expansion of domestic industries:
X cheaper, X led growth