Exchange Rates Flashcards
What is an exchange rate?
The value of the currency of a nation expressed in terms of the currency of another nation
What is cost structure?
The overall framework within a country that contributes to the final price of a commodity produced by that country
What is currency depreciation?
A decrease in the value of a currency relative to other currencies under a floating exchange regime
Example of currency depreciation imports?
A depreciation of the Australian dollar increases the price of imported commodities and consequently, makes them less attractive to Australian consumers
What is currency devaluation?
The result of a deliberate decision by the RBA and Australian Government to lower the Australian dollar
What is currency appreciation?
An increase in the value of a currency relative to other currencies under a floating exchange regime
Example of currency appreciation to imports?
An appreciation of the Australia dollar decreases the price of imported commodities, making them more attractive to Australian consumers
Example of currency appreciation to exports?
An appreciation of the Australian dollar makes Australian exports more expensive for foreign buyers, potentially reducing their attractiveness and demand in international markers
Example of currency depreciation to exports?
A depreciation of the Australian dollar makes Australian exports cheaper for foreign buyers, potentially increasing their attractiveness and demand in international markets
What is currency revaluation?
Currency revaluation is the official increase in the value of a country’s currency relative to other currencies, often implemented by a government or central bank
What is the foreign exchange (FOREX) market?
A market where international currencies are bought and sold
What is the trade weighted index (TWI)
TWI is a measure of the level of the value of the Australian dollar against a basket of foreign currencies of major trading partners
These currencies are weighted according to their significance to Australian trade flows
What is a fixed exchange rate?
The value of the currency is determined by the government fixing it to the value of another currency at a certain level and guaranteeing to maintain that level
What are the advantages of a fixed exchange rate?
The stability and predictability of the exchange rate encourages growth of international trade and enables easier long-term planning for industries
What are the disadvantages of a fixed exchange rate?
- a stock of international reserves and gold is required to maintain artificially high or low value
- its open to speculation
- changes tend to occur in larger steps so they have larger impacts on the economy
Effects of depreciation? (5)
- Australian exports become less expensive to overseas buyers
- there is growth in income and employment in export-orientated industries
- Australian imports become more expensive and this could lead to a decline in imports and growth of import-substitution industries or increased inflation
- there is an increased level of external debt that is measured in overseas currencies
- the RBA may increase interest rates to slow down the depreciation of the dollar, and this may have an impact on domestic consumption and investment
Effect of appreciation?
- Australian exports become more expensive to foreign buyers, and so income and employment in export industries may decline
- Australian imports become cheaper, and increased demand for imports may lead to an increase in the current account deficit
- there are decreased level of external debt, where debt is measured in overseas currencies
- the government may be more able to repay interest or external debt and so reduce the income component on the current account deficit
- inflation may decrease as domestic prices on imports decline
What is a floating exchange rate?
The value of a currency is determined by the forces of supply and demand in the foreign exchange market
Factors effecting demand of the Australian dollar?
- exports goods and services
- incomes received
- capital flow
- speculation
Factors affecting the supply of Australian dollar?
- import goods and services
- incomes payable
- capital outflow
- speculation
What are the advantages of a floating exchange rate?
- the balance of payments is always in equilibrium
- money supply is not affected by international exchanges, so domestic policy can operate independently of overseas exchange rate pressures
- it is not necessary for the RBA to hold large amounts of foreign reserves to maintain the artificial exchange levels at a fixed rate
What are the disadvantages of a floating exchange rate?
- the volatility of exchange rates can create uncertainty for exporters and importers
- the level of external debt can change when debt is largely measured in overseas currency
What are the terms of trade?
A statistical concept that highlights the relationship between export prices and import prices
What is the terms of trade index?
A statistical measurement used by economists to produce an index number used to monitor price fluctuations
How is terms of trade calculated?
Export / import
What is the export price index?
A statistical measurement used by economists to produce an index number used to monitor fluctuations in export prices
What is the import price index?
A statistical measurement used by economists to produce an index number used to monitor fluctuations in import prices
What is balance of trade / trade balance?
- the difference between the value of a country’s exports and imports for a given period
- exports > imports = surplus balance of trade
- exports < imports = deficit balance of trade
Extend of terms of trade?
Terms of trade is an indicator of a country’s economic health and trading efficiency, especially around the balance of payments issue
It tells you how many units of exports it takes to buy a unit of imports and allows you to identify if a nation is accumulating capital
The terms of trade increases because:
- export prices rise and the increase is higher than import prices
- exports prices rise but import price fall or remain unchanged
- export prices fall but at a lower rate than the fall of import prices
- export prices are unchanged while import prices fall
Terms of trade decrease because:
- export prices rise, but the increase is smaller than the increase in import prices.
- export prices rise, while import prices rise at a higher rate.
- export prices fall at a higher rate than the fall in import prices.
- export prices remain unchanged, while import prices rise.
Terms of trade measurments?
terms of trade > 100% = accumulating capital and favorable trading conditions
terms of trade < 100% = spending capital and unfavorable trading conditions
What will impact terms of trade?
Exchange rates and the price of commodities which will determine the volume of commodities
