chp17 Flashcards
foreign exchange rate
the price of one currency in terms of another
example of foreign exchange rate
GPB £1 = USD $1.3
foreign exchange market
the market for trading currencies and checkable deposits denominated in particular currencies
spot transactions
the current, immediate exchange of bank deposits as opposed to a future date
spot exchange rate
the exchange rate at which a spot transaction occurs
forward transactions
the exchange of bank transactions at a future date as opposed to right now
forward exchange rate
the exchange rate at which a forward transaction occurs
appreciation
increase in value of a currency
depreciation
the decrease in value of a currency
explain this
percentage change in value currencies
if it was 80p to the dollar, but now 65p to the dollar the dollar has depreciated. By how much?
(0.65-0.8)/0.8 = -0.1875
depreciated by 18.75%
how are goods affected when the dollar appreciates?
foreign goods are cheaper in USA, USA goods are more expensive in other countries.
Theory of purchasing Power Parity (PPP)
goods can be purchased at the same pricing ratio or exchange rate in different countries
real exchange rate
the rate at which domestic goods can be exchanged for foreign goods
tariff
taxing imported goods
why do tariffs exist?
to help own country with domestic goods (making english cars in UK cheaper to buy than german cars sold in UK)
quota
limit cap placed on the quantity of goods that can be imported
example of quota
USA wants to ‘protect American cars’, and only imports 100,000 Japanese cars
how many factors impact exchange rate?
4
what 4 factors impact exchange rates? (DTIP)
1) Domestic Price Level
2) Trade Barriers
3) Import & Export Demand
4) Productivity
