# Macroeconomics and Its Influence on International Trade. - PowerPoint PPT Presentation

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Macroeconomics and Its Influence on International Trade. AN EXCHANGE RATE CAN BE CONSIDERED AS A PRICE. WITH A SUPPLY CURVE AND A DEMAND CURVE. How are exchange rates quoted?. Most are quoted in Nations A’s currency in terms of U.S. dollars. P f = P us *k. With the Japanese Yen = 98

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Macroeconomics and Its Influence on International Trade.

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### Macroeconomics and Its Influence on International Trade.

AN EXCHANGE RATE CAN BE CONSIDERED AS A PRICE.

WITH A SUPPLY CURVE AND A DEMAND CURVE

### Most are quoted in Nations A’s currency in terms of U.S. dollars.Pf= Pus*k

With the Japanese Yen = 98

One \$ will purchase 98 yen

98 = 1*98

Or One \$ will purchase 14 Mexican Pesos

In the case of the British Pound and the Euro the exchange is quoted differently.One Euro = 1.33 dollars One British Pound = 1.45 dollars

### British Pound

A bushel of corn say at \$4.00 in June 2008 would cost a German Processor 2.5Euros (1 euro = \$1.67)That same \$4.00/bushel wheat would cost the German Processor 3.2 Euros in February 2009 (1 euro = \$1.26)

A 10 Euro bottle of wine would cost an American consumer \$16.00 June 2008That same bottle of wine would cost the American \$12.60 in February of 2009

FOREIGN INTERESTS (INDIVIDUALS AND BUSINESSES) MUST EXCHANGE THEIR CURRENCY IN ORDER TO MAKE AN INTERNATIONAL TRANSACTION

ASSUME TWO COUNTRIES -- FRANCE AND U.S.

IF THE FRENCH WANT TO MAKE AND INTERNATIONAL TRANSACTION THEY WILL HAVE TO CONVERT THE EURO TO \$

THE DEMAND FOR DOLLARS COMES FROM FRENCH PEOPLE WHO WISH TO PURCHASE U.S. GOODS AND SERVICES OR...

WANT TO INVEST IN U.S. ASSETS

THE SUPPLY OF U.S. DOLLARS COMES FROM FRENCH WHO HAVE SOLD THEIR GOODS, SERVICES OR ASSETS TO AMERICANS

Wheat

Dollar Index

A LITTLE HISTORY:

THE BRETTON WOODS AGREEMENT (1945)

THE U.S. DOLLAR WAS FIXED RELATIVE TO THE PRICE OF GOLD ( THE GOLD STANDARD)

THE RESULT OF THE GOLD STANDARD WAS TO FIX THE EXCHANGE RATES

THE CENTRAL BANKS OF EACH COUNTRY WERE RESPONSIBLE TO MAINTAIN THE RATE

THE BRETTON WOODS SYSTEM LASTED TO 1973

HIGH INFLATION

OUTFLOW OF U.S. DOLLARS FOR OIL

THE DOLLARS WAS OVERVALUED AND THE COST OF MAINTAINING WAS HIGH

Bond Prices

Higher Bond Prices

Lower Interest Rates

\$1 = 8 Yuan

1 Yuan = 12.5 cents

\$10/bu soybeans cost Chinese buyer 800 Yuan

\$1 = 7 Yuan

1 Yuan = 14 cents

\$10/bu soybeans cost