At the end of the lesson u should be able to understand meaning of exchange rate er meaning of nominal er meaning and formula of effective er
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at the end of the lesson u should be able to: understand meaning of exchange rate (ER) meaning of Nominal ER meaning and formula of Effective ER PowerPoint PPT Presentation


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at the end of the lesson u should be able to: understand meaning of exchange rate (ER) meaning of Nominal ER meaning and formula of Effective ER meaning of Trade Weighted ER calculate Trade Weighted ER meaning of Real ER identify items that create a demand for a currency

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At the end of the lesson u should be able to understand meaning of exchange rate er meaning of nominal er meaning and formula of effective er

at the end of the lesson u should be able to:

understand

  • meaning of exchange rate (ER)

  • meaning of Nominal ER

  • meaning and formula of Effective ER

  • meaning of Trade Weighted ER

  • calculate Trade Weighted ER

  • meaning of Real ER

  • identify items that create a demandfor a currency

  • identify items that create a supply for a currency


Exchange rate

Exchange Rate

  • Price of one currency in terms of another

  • The rate at which one currency can be exchanged for another e.g.

  • £1 = $2.00

  • £1 = €1.50


At the end of the lesson u should be able to understand meaning of exchange rate er meaning of nominal er meaning and formula of effective er

£

Supose exchange rate is $2.00/

£

£

10

40,000

$20

$80,000


Nominal exchange rate

Nominal exchange rate

  • ER of £1 =RM5.80 means need RM5.80 to buy £1

  • are quoted in national newspapers

  • Since one currency is expressed against another, nominal ERs are bilateral rates.

  • €/$

  • £/$

  • ¥/$


Effective exchange rate

Effective Exchange Rate

  • measures the value of a currency against a basket/group of currencies

  • multilateral rate

  • Trade Weighted Exchange Rate is used

  • in index form

  • the weight accorded to each currency depends on the proportion of trade done with the country.

  • the larger the size of the trade, the larger the weightage.


The weights of the currencies of various countries in the sterling exchange rate index

The weights of the currencies of various countriesin the sterling exchange rate index


Trade weighted index twi

Trade WeightedIndex (TWI)

  • UK’s trade with US – 70% trade with France – 30%

  • If £  10% against USD

  • £  20% against €

  • % = (-10% x 0.7) + (-20% x 0.3)

    = - 7% - 6%

    = - 13%

    TWI = 100 - 13 = 87


At the end of the lesson u should be able to understand meaning of exchange rate er meaning of nominal er meaning and formula of effective er

Sterling exchange rates: 1980–2003


Real effective er

Real Effective ER

  • Real ER takes price changes into account

  • = effective ER X Domestic Price level

    Foreign Price level


Dd ss of currencies

DD & SS of Currencies

  • Exchange rates are determined by the demand for and the supply of currencies on the foreign exchange market (forex)

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

    • International Trade in G & S

    • Investments

    • Speculation


The flow of currencies

The Flow of Currencies:

Whisky sold to Italian hotel

Export earnings for UK

(Credit on Balance

of Payments)

€ changed to £

 dd for £

 ss of €

Map courtesy of http://www.theodora.com


The flow of currencies1

The Flow of Currencies:

Oil from Russia

Oil

£ changed into Roubles

 dd for roubles

 ss of £

Export earnings for Russia

Import expenditure for the UK

(Debit on balance of payments)

Map courtesy of http://www.theodora.com


1 trade in goods n services

1) Trade in goods n services

  • X creates __ for the currency & M creates __ of the currency.

  • e.g. DD by Italians for British’s whisky creates a ___ for £ and a ___ of €

  • DD by Britons for Russian oil creates a ___ for roubles and a __ of __


2 investments

2) Investments

  • Inward investment to an economy creates a ___ for its currency.

  • Outward investment from an economy creates a ___ of its currency.

  • British Telecom investing in M'sia creates a dd for __ and a ss of __

  • YTL Malaysia investing in UK create a dd for __ and a ss of __.


3 speculation

3) Speculation

  • If expect ER to  , will buy the currency creating __ for the currency

  • If expect ER to  , will ___ the currency creating __ of the currency


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