Exchange RatesExchange Rates

Exchange RatesExchange Rates

When international trade occurs, one When international trade occurs, one nation exchanges money, or nation exchanges money, or currency, in return for another currency, in return for another nation.nation.

Every nation is ultimately paid in its Every nation is ultimately paid in its own currency.own currency.

Exchange RatesExchange Rates

The relative values of different The relative values of different currencies are expressed as an currencies are expressed as an exchange rateexchange rate, the price of one , the price of one nation’s currency in terms of another nation’s currency in terms of another nation’s currency.nation’s currency.

For example, the exchange rates for For example, the exchange rates for the U.S. dollar and the Japanese yen the U.S. dollar and the Japanese yen tell you how many yen the Japanese tell you how many yen the Japanese must exchange for one dollar or what must exchange for one dollar or what percentage of a dollar Americans percentage of a dollar Americans must pay for one yen.must pay for one yen.

Exchange rates are always changing.Exchange rates are always changing. The exchange rates between two The exchange rates between two

currencies depends on how much currencies depends on how much demand there is for each country’s demand there is for each country’s exports at any given time.exports at any given time.

When there is more demand for a When there is more demand for a nation’s products, people need more nation’s products, people need more of that nation's currency to buy the of that nation's currency to buy the products.products.

The table below shows the approximate exchange The table below shows the approximate exchange rates of the American dollar for the currency of rates of the American dollar for the currency of

several other nations on Oct. 2014.several other nations on Oct. 2014.

1.000.07369Mexican peso

1.000.0093Japanese yen

1.001.27Euro

1.000.89Canadian dollar

Value of foreign currency

(in U.S. dollars)

Value of $1 U.S. (in foreign currency)

Exchange rates change over time.Exchange rates change over time.Table 2 shows how the exchange rate between the Table 2 shows how the exchange rate between the

Canadian dollar and the American dollar changed from Canadian dollar and the American dollar changed from 1997 to 2007.1997 to 2007.

1.030.972007

0.731.391997

Value of $1 Canadian dollar in U.S. dollars

Value of $1 U.S. in Canadian

dollars

Some Americans benefit from a strong dollar, Some Americans benefit from a strong dollar, while others benefit from a weak dollar.while others benefit from a weak dollar.

When the dollar is strong, or When the dollar is strong, or appreciates:appreciates:• Imports increase and are cheaper for Imports increase and are cheaper for

consumers to buy.consumers to buy.• Travel abroad is cheaper for American Travel abroad is cheaper for American

tourists.tourists.• U.S. exports decline.U.S. exports decline.• The U.S. trade deficit increases.The U.S. trade deficit increases.

Some Americans benefit from a strong dollar, Some Americans benefit from a strong dollar, while others benefit from a weak dollar.while others benefit from a weak dollar.

When the dollar is weak, or When the dollar is weak, or depreciates:depreciates:• U.S. exports increase and the prices of U.S. exports increase and the prices of

exports go up.exports go up.• Travel abroad is more expensive for Travel abroad is more expensive for

American tourists.American tourists.• The U.S. trade balance improvesThe U.S. trade balance improves• Foreign investment is U.S. businesses Foreign investment is U.S. businesses

increases.increases.

Exchange rates are very important to Exchange rates are very important to people involved in international people involved in international trade, tourism, and investment.trade, tourism, and investment.

That is why changes in the rates are That is why changes in the rates are posted daily and experts are hired to posted daily and experts are hired to predict possible changes in the predict possible changes in the future.future.

Question #1Question #1

What might cause the value of the What might cause the value of the U.S. dollar to appreciate in U.S. dollar to appreciate in relationship to the euro?relationship to the euro?

A. increased demand for European A. increased demand for European products in the U.S.products in the U.S.

B. increased demand for U.S. products in B. increased demand for U.S. products in Europe.Europe.

C. increases in the U.S. money supply.C. increases in the U.S. money supply. D. high rates of inflation in the U.S.D. high rates of inflation in the U.S.

Answer:Answer:

B. Increased demand for U.S. B. Increased demand for U.S. products in Europe.products in Europe.

Question #2Question #2

One advantage of a weak dollar is One advantage of a weak dollar is thatthat

A. travel abroad is cheaper for A. travel abroad is cheaper for Americans.Americans.

B. American income tax rates go B. American income tax rates go down.down.

C. Imports are cheaper for C. Imports are cheaper for Americans to buy.Americans to buy.

D. American exports increase.D. American exports increase.

Answer Question #2Answer Question #2

D. American exports increase.D. American exports increase.

Question 3Question 3

What must first take place in order What must first take place in order for one country to trade with for one country to trade with another?another?

Answer Question 3Answer Question 3

Exchange currency for the currency Exchange currency for the currency accepted by the trading country.accepted by the trading country.

Question #4Question #4

0.0910.34

Value of 1 peso in U.S. dollars

Value of $1 U.S. in pesos

Stacy traveled to Mexico and took $100 in U.S. currency. When she exchanged the $100 for pesos, she received about

A. 10.3 pesos

B. 103 pesos

C. 1,034 pesos

D. 900 pesos

Answer Question #4Answer Question #4

. 1,034 pesos. 1,034 pesos

($100 X 10.34 = 1,034 pesos)($100 X 10.34 = 1,034 pesos)