Currency Exchange Rate

Currency Exchange Rate

International Economics 3

Lesson Overview

• What is Globalization?
• Specialization and Trade,
• Exchange Rates
• The Balance of Payments

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Ibironke Sonuga Economics Year 11

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Ibironke Sonuga Economics Year 11

International trade requires the exchange
of foreign currencies

Payments for imports and exports and for all other
international transactions requires the exchange of national
currencies. This takes place on the global foreign exchange
market

Has to exchange
Indian rupees for

euros

Has to

exchanges UK
pounds for US

dollars

Indian company

uses French

advertising company

Italian invests in an
Argentinian shipping

company

Has to exchange

euros for

Argentinian pesos

UK tourist takes

holiday in the USA

Word Cloud

Mention Some currencies you know

Exchange Rate:

​The rate at which one currency can be exchanged for another is important in trade e.g.

  $1 = N?

To convert $ into £ - divide by the $ rate:.
–
To convert $3.45 to £, $ at a rate of £1 = $1.90,divide
$3.45 by 1.90 = £1.82

To convert £ into (e.g.) $. Multiply the sterling amount by the $ rate.
e.g. To convert £5.70 to $ at a rate of £1 = $1.90, multiply 5.70 x 1.90 = $10.83

Converting currencies:

Exchange Rates

Determinants of Exchange Rates:

Exchange rates are

determined by the demand for and supply of currencies on the foreign exchange market

• The demand and supply of currencies is in turn determined
by:

6/9/2024

Ibironke Sonuga Economics Year 11

• Relative interest rates

• The demand for imports (D£)

• The demand for exports (S£)

• Investment opportunities

• Speculative sentiments

• Global trading patterns

• Changes in relative inflation rates

Exchange Rates

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Ibironke Sonuga Economics Year 11

​Determinants of Exchange Rates are:

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Ibironke Sonuga Economics Year 11

The Foreign Exchange Market (Forex)

Forex is the world’s largest financial market. It consists of all those
people, organizations and governments willing and able to buy or sell
national currencies.

The exchange rate would be a proper reflection of
the purchasing power in each country if the relative
values bought the same amount of goods in each
country.

• E.g. If the price of a pint of Stella in the UK was

£3.00 and in Europe €4.50, the exchange rate
between the two countries should be £1 = €1.50

If any lower than this value, the £ would be
undervalued and if any higher, the £ would be
overvalued.

Exchange Rates

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Ibironke Sonuga Economics Year 11

Multiple Choice

What is an exchange rate?

• The rate at which goods are exchanged between two countries

• The price of one nation's currency in terms of another's

• How many US dollars you can exchange for RMB at Travelex

• The price of goods in terms of a foreign currency

Multiple Choice

According to the table, what is the Euro equivalent of 1 USD?

• 1.32 Euros

• 0.53 Euros

• .76 Euros

• 1.59 Euros

Exchange Rates

The volumes and the actual amount of income and expenditure will depend on the relative price elasticity of demand for imports and
exports.

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Ibironke Sonuga Economics Year 11

• Floating Exchange Rates:

– Price determined only by demand and supply

of the currency – no government
intervention

• Fixed Exchange Rates:

– The value of a currency fixed in relation to

an anchor currency – not allowed to
fluctuate

• Dirty Floating or Managed Exchange Rate:

– rate influenced by government via

central bank around a preferred rate

Exchange Rates

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Ibironke Sonuga Economics Year 11

Multiple Choice

An increase in the value of a country’s currency in a fixed exchange rate system.

• speculation

• fixed exchange rate

• devaluation

• revaluation

Multiple Choice

A decrease in the value of a country’s currency in a fixed exchange rate system.

• speculation

• fixed exchange rate

• devaluation

• revaluation

Exchange Rates

Appreciation of the exchange rate:

A rise in the value of £ in relation to

other currencies – each £ buys more of
the other currency e.g.

£1 = $1.85 £1 = $1.91

UK exports appear to be more expensive

( Xp)

Imports to the UK appear to be cheaper

( Mp)

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Ibironke Sonuga Economics Year 11

Exchange Rates

Depreciation of the Exchange Rate

A fall in the value of the £ in relation to other
currencies - each £ buys less of the foreign
currency e.g.

£1 = € 1.50 £1 = € 1.45

UK exports appear to be cheaper ( Xp)

Imports to the UK appear more expensive

( Mp)

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Ibironke Sonuga Economics Year 11

Multiple Choice

What type of exchange rate system do most countries operate under?

• Flexible

• Floating

• Fictitious

• Fixed

Multiple Choice

the rate which is determined by the govt. is known as-

• fixed exchange rate

• floating exchange rate

Exchange Rates

S£

Shortage

Q1

Q3

Q2

1.85

1.90

Quantity on
Forex Markets

D£

D£1

$ per £

The rise in
demand creates a
shortage in the
relationship
between demand
for £ and supply
– the price
(exchange rate)
would rise

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Ibironke Sonuga Economics Year 11

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Ibironke Sonuga Economics Year 11

Further Readings…..

1. Complete Economics
Unit 6.3 Pages 456 - 472

2. Fundamentals of Economics,
Chapter 40. pages 480- 498

• Relative interest rates
• The demand for imports (D£)
• The demand for exports (S£)
• Investment opportunities
• Speculative sentiments
• Global trading patterns
• Changes in relative inflation rates

Exchange Rates

6/9/2024

Ibironke Sonuga Economics Year 11