Chapter 14 Global Editlon Exchange Rates and the Foreign Exchange Market: An Asset Approach International Economics THEORY & POLICY Ninth Edition Paul R. Krugman Maurice Obstfeld Marc J. Melltz PEARSON PEARSON Copyright 2012 Pearson Education. All rights reserved
Copyright © 2012 Pearson Education. All rights reserved. Chapter 14 Exchange Rates and the Foreign Exchange Market: An Asset Approach
Preview The basics of exchange rates Exchange rates and the prices of goods The foreign exchange markets o The demand of currency and other assets a model of foreign exchange markets role of interest rates on currency deposits role of expectations of exchange rates Copyright G 2012 Pearson Education. All rights reserved 14-2
Copyright © 2012 Pearson Education. All rights reserved. 14-2 Preview • The basics of exchange rates • Exchange rates and the prices of goods • The foreign exchange markets • The demand of currency and other assets • A model of foreign exchange markets – role of interest rates on currency deposits – role of expectations of exchange rates
Definitions of Exchange rates Exchange rates are quoted as foreign currency per unit of domestic currency or domestic currency per unit of foreign currency Suppose you are U.s. citizen How much $s can be exchanged for one yen? Es￥=$0.011185/￥( direct or American"term) How much yen can be exchanged for one dollar? Ey/s=*89.40/(indirect or European"term) Exchange rates allow us to denominate the cost or price of a good or service in a common currency. How much does a nissan cost? 42500, 000 Or,￥2500000XE(0.011185)=$2796250 14-3
Copyright © 2012 Pearson Education. All rights reserved. 14-3 Definitions of Exchange Rates • Exchange rates are quoted as foreign currency per unit of domestic currency or domestic currency per unit of foreign currency. Suppose you are U.S. citizen: – How much $ can be exchanged for one yen? E$/¥=$0.011185/¥ (direct or “American” term) – How much yen can be exchanged for one dollar? E¥/$=¥89.40/$ (indirect or “European” term) • Exchange rates allow us to denominate the cost or price of a good or service in a common currency. – How much does a Nissan cost? ¥2,500,000 – Or, ¥2,500,000 x E$/¥(0.011185) = $27,962.50
Examples(cont) The price of one iphone 6(16G)in HK is $720 The exchange rate is￥6.21/$,then:$720×￥6.21/$ ￥4470 In mainland China the price is f5288 What's the dollar price of iphone in mainland china? Copyright 2012 Pearson Education. All rights reserved 14-4
Copyright © 2012 Pearson Education. All rights reserved. Examples(con’t) – The price of one iphone 6(16G) in HK is $720. The exchange rate is ￥6.21/$ ,then： $720× ￥6.21/$ =￥4470 – In mainland China, the price is￥5288. What’s the dollar price of iphone in mainland China？ 14-4
Table 14-1: Exchange Rate Quotations DOLLAR DoAk 76134217810897300731144802072 k3036004237007550ms 0041.5710011842242002 Lad3241940003449033003854300 0.377 9s7051s42004sa 645003225053505263到5 519880003627000 0a34324460614⊥38025 离ias0masa25iam 1472725101 二m mn06.12600758.4911. 014 2038339.455028253175700 90s740006121840714040n :n559602.800077585.231 52270a 油解0au19.12744.52.38040沿314.2 面3227040040447327 00:7539587 5383400774628000290110如127 157420002321 0.15311.5340O4 220450030599007362040 0l7 0. 002E UAE hm6730 502500011416。0013 3127104.260037720 004081am11 026l53 16727 1145 s4081215428 825aD 34659ai481435wm 081000 427810331477么的形6 0)103502400143220.55127a4374 22.3000 9230m7s372794042 l0心200414319心a0271204,008 m3216721 001431454a012s70120 00016717 103048014287428172405cw 1362m0 n0.2s16 0.39040△00c4700.△001 62221 872 00033 0ws325900a0254.51 4.5162000375.477032 D=0211200 2924884642003528137840 体wu13.1920△06718.28N00037206860c2 Ns18300216000072197000f(2l4yn 0.4755Meh 53心2058.29470.0421005542043Ms 0171.9764101ah 围艦 120550001 120240004 71003 44.39004.4565344.1014245心232 6456000自8490m101040a Hra awdemeed on Aen a an laina"Ta danma-gerne fer the Ean ad aara th s aaownbosth oter lean tda bdmo both un d 时dt2000 ta rette Mr/Aa Tcomnarabtda 340N, iriaAt1727564, Mdatlneammbeaxfna 4033),Cpna 0585274 3 Wuhlraor22032l,和204,sm础囹54m和6. Copyright 2012 Pearson Education. All rights reserved 14-5
Copyright © 2012 Pearson Education. All rights reserved. 14-5 Table 14-1: Exchange Rate Quotations
Data from Bank of China: EYuan/(100 Other Currency) 货币名称( Currency)现钞买入价(se)现钞卖出价(Buy)发布日期(Date)发布时间(Time) 澳大利亚元 536.69 557.67 2014-03-09 10:30:00 加拿大元 533.25 554.66 2014-03-09 10:30:00 瑞士法郎 673.29 700.32 2014-0309 10:30:00 丹麦克朗 10994 114.36 2014-03-09 10:30:0 欧元(Euro) 85343 10:30:00 英镑( Pound) 988.51 1028.2 2014-03-0 10:30:00 港币(HK$) 78.13 2014-03-09 10:30:00 0.0519 0.0557 2014-03-09 10:30:00 日元Yen) 5.7274 5.9513 2014-03-09 10:30:00 朝国元 0.5549 0.6017 2014-03-09 10:30:00 澳门元 79.28 2014-03-09 10:30:00 林吉特 2014-03-09 10:30:00 挪威克朗 102.74 2014-0309 10:30:00 523 2014-03-09 10:30:00 菲律宾比索 13.29 14.25 10:30:00 卢布 16.29 1745 2014-03-09 10:30:00 92.63 96.34 2014-03-09 10:30:00 484.71 2014-03-09 10:30:00 18.33 1965 2014-03-09 10:30:00 新台币 19.56 2014-03-09 10:30:00 613.73 2014-03-09 10:30:00 Copyright 2012 Pearson Education. All rights reserved 14-6
Copyright © 2012 Pearson Education. All rights reserved. Data from Bank of China: EYuan/(100 Other Currency) 14-6 货币名称(Currency) 现钞买入价(Sell) 现钞卖出价(Buy) 发布日期(Date) 发布时间(Time) 澳大利亚元 536.69 557.67 2014-03-09 10:30:00 加拿大元 533.25 554.66 2014-03-09 10:30:00 瑞士法郎 673.29 700.32 2014-03-09 10:30:00 丹麦克朗 109.94 114.36 2014-03-09 10:30:00 欧元(Euro) 820.49 853.43 2014-03-09 10:30:00 英镑(Pound) 988.51 1028.2 2014-03-09 10:30:00 港币 (HK$) 78.13 79.06 2014-03-09 10:30:00 印尼卢比 0.0519 0.0557 2014-03-09 10:30:00 日元(Yen) 5.7274 5.9513 2014-03-09 10:30:00 韩国元 0.5549 0.6017 2014-03-09 10:30:00 澳门元 73.96 79.28 2014-03-09 10:30:00 林吉特 2014-03-09 10:30:00 挪威克朗 98.77 102.74 2014-03-09 10:30:00 新西兰元 500.76 523.98 2014-03-09 10:30:00 菲律宾比索 13.29 14.25 2014-03-09 10:30:00 卢布 16.29 17.45 2014-03-09 10:30:00 瑞典克朗 92.63 96.34 2014-03-09 10:30:00 新加坡元 466 484.71 2014-03-09 10:30:00 泰国铢 18.33 19.65 2014-03-09 10:30:00 新台币 19.56 20.96 2014-03-09 10:30:00 美元(US$) 606.38 613.73 2014-03-09 10:30:00
Depreciation and Appreciation Depreciation is a decrease in the value of a currency relative to another currency a depreciated currency is less valuable(less expensive) and therefore can be exchanged for (can buy a smaller amount of foreign currency $1/-$1.20/E means that the dollar has depreciated relative to the euro(or e decreases). It now takes $1.20 to buy one euro so that the dollar is less valuable The euro has appreciated relative to the dollar it is now more valuable Copyright 2012 Pearson Education. All rights reserved 14-7
Copyright © 2012 Pearson Education. All rights reserved. 14-7 Depreciation and Appreciation • Depreciation is a decrease in the value of a currency relative to another currency. – A depreciated currency is less valuable (less expensive) and therefore can be exchanged for (can buy) a smaller amount of foreign currency. – $1/€ → $1.20/€ means that the dollar has depreciated relative to the euro (or E €/ $ decreases). It now takes $1.20 to buy one euro, so that the dollar is less valuable. – The euro has appreciated relative to the dollar: it is now more valuable
Depreciation and Appreciation (cont) Appreciation is an increase in the value of a currency relative to another currency An appreciated currency is more valuable(more expensive) and therefore can be exchanged for (can buy a larger amount of foreign currency $1→$0.90/毛 means that the dollar has appreciated relative to the euro(or e increases). It now takes only $0. 90 to buy one euro so that the dollar is more valuable The euro has depreciated relative to the dollar it is now less valuable Copyright 2012 Pearson Education. All rights reserved 14-8
Copyright © 2012 Pearson Education. All rights reserved. 14-8 Depreciation and Appreciation (cont.) • Appreciation is an increase in the value of a currency relative to another currency. – An appreciated currency is more valuable (more expensive) and therefore can be exchanged for (can buy) a larger amount of foreign currency. – $1/€ → $0.90/€ means that the dollar has appreciated relative to the euro (or E $/€ increases). It now takes only $0.90 to buy one euro, so that the dollar is more valuable. – The euro has depreciated relative to the dollar: it is now less valuable
Depreciation and Appreciation (cont) a depreciated currency is less valuable, and therefore it can buy fewer foreign produced goods that are denominated in foreign currency A Nissan costs *2, 500,000= $25,000 at Es/=0.01 becomes more expensive $27, 962.50 at Es/y=0.011185 a depreciated currency means that imports are more expensive and domestically produced goods and exports are less expensive a depreciated currency lowers the price of exports relative to the price of imports.(China?) Copyright G 2012 Pearson Education. All rights reserved 14-9
Copyright © 2012 Pearson Education. All rights reserved. 14-9 Depreciation and Appreciation (cont.) • A depreciated currency is less valuable, and therefore it can buy fewer foreign produced goods that are denominated in foreign currency. – A Nissan costs ¥2,500,000 = $25,000 at E$/¥=0.01 – becomes more expensive $27,962.50 at E$/¥= 0.011185 • A depreciated currency means that imports are more expensive and domestically produced goods and exports are less expensive. • A depreciated currency lowers the price of exports relative to the price of imports. (China?)
Depreciation and Appreciation (cont) An appreciated currency is more valuable, and therefore it can buy more foreign produced goods that are denominated in foreign currency A Nissan costs 42, 500,000=$27, 962.50 at Es/y= 0.011185 becomes less expensive $25,000 at Es/=0.010 An appreciated currency means that imports are less expensive and domestically produced goods and exports are more expensive An appreciated currency raises the price of exports relative to the price of imports Copyright G 2012 Pearson Education. All rights reserved 14-10
Copyright © 2012 Pearson Education. All rights reserved. 14-10 Depreciation and Appreciation (cont.) • An appreciated currency is more valuable, and therefore it can buy more foreign produced goods that are denominated in foreign currency. – A Nissan costs ¥2,500,000 = $27,962.50 at E$/¥= 0.011185 – becomes less expensive $25,000 at E$/¥= 0.010 • An appreciated currency means that imports are less expensive and domestically produced goods and exports are more expensive. • An appreciated currency raises the price of exports relative to the price of imports