Foreign Exchange Rates: the value of one currency in relation to another currencyCan be expressed as currency vs. one dollar or as the dollar value for each unit of foreign

currencyExample: 1 US = .76 EUR

or 1 EUR = 1.31 US

Why is Foreign Exchange important?When people from one nation (United States) purchase a good (Home Entertainment System) from a company in another nation (Germany) the company wants to be paid in their currency.

In this case it is the responsibility of the consumer to convert the American dollar to the Euro.

Foreign Exchange Markets: Facilitate the buying and selling national currencies

Appreciation: when one currency increases in value relative to other currencies

Exports more expensive and imports cheaper

If the American dollar appreciates, we make more profit on exports, and have more purchasing power on imports.

Depreciation: when one currency depreciates in value relative to other currencies

Exports cheaper and imports more expensive

If the American dollar depreciates, we make less profit on exports, and have less purchasing power on imports.

The following tables chow the exchange rates for two different years:

Did the US dollar appreciate or depreciate in relation to the British pound?Who would be helped and who would be hurt?

The following tables chow the exchange rates for two different years:

Did the US dollar appreciate or depreciate in relation to the Swiss franc?Who would be helped and who would be hurt?

The following tables chow the exchange rates for two different years:

Did the dollar appreciate or depreciate in relation to the Mexican peso?Who would be helped and who would be hurt?

The following tables chow the exchange rates for two different years:

Did the dollar appreciate or depreciate in relation to the Thai baht?Who would be helped and who would be hurt?

These exist for three reasons: The “3 T’s”Trade- exchanges between governments, banks,

businesses, etc.

Tourism- exchange of currencies by vacationers

Travel- Airlines, cruise lines, business travel, students etc.

Each requires a record of payment and exchange

Balance of Payments: a record of all payments and receipts between residents, businesses and gov’ts of one country and those same groups in another country. Measured 2 ways:

Current account = $ value of all exports-minus-

importsIf positive, we have a surplusIf negative, we have a shortage

Income earned in other countries by American citizens

And foreign income earned in US

The difference between imported and exported products

Trade surplus: more exports than importsTrade deficit: more imports than exportsUS trade deficits began in the 1970’s with

the Oil Embargo and the dramatic rise in the price of oil

The last time the US had a trade surplus was 1981.

The US trade deficit was $46.6 billion in December 2014.

Capital account = Flow of money between nations.

This includes the investments in foreign nations and businesses made by American individuals and businesses.

Example: If a person from Brazil buys a US Savings Bond this is credited to the US Capital Account. But when Americans buy stock in a Japanese firm, this is a debit.

1. Dollar appreciates2. Dollar depreciates3. Balance of payments4. Current account5. Capital account6. Trade surplus7. Trade deficit8. Trade Barriers9. Tariffs

10. Embargos11. Quotas12. Subsidies13. Standards14. Free Trade15. Protectionism16. Most Favored Nation17. NAFTA18. European Union19. ASEAN