Agri 2312 chapter 17 exchange rates and agricultural trade
Exchange Rates and Agricultural Trade Chapter 17
Discussion Topics <ul><li>Exchange rates and the foreign exchange market </li></ul><ul><li>The balance of payments </li></ul><ul><li>The international monetary system </li></ul><ul><li>Exchange rate determination </li></ul><ul><li>Exchange rates and U.S. agricultural trade </li></ul><ul><li>Considerations for policy coordination </li></ul>
Exchange Rate Defined The exchange rate is the number of units of a foreign currency required to obtain one unit of a domestic currency. The reciprocal of this rate expresses the number of units of a domestic currency required to obtain one unit of a foreign currency. These rates can be thought of as the value of the domestic currency relative to a foreign currency (i.e., the value of the $ relative to the £ or ¥ ). Page 335
Page 337 When the value of the dollar appreciates in value, the exchange rate index increases. A depreciation of the value of a dollar causes the index to decline.
Page 337 The line “Canadian dollar (in U.S. dollars)” of 1.305 means that a Canadian dollar exchanges for almost $1.31 in U.S. currency. One British Pound is worth about $1.82 in U.S. currency.
Balance of Payments The balance of payments (BOP) is made up of three main accounts: Current account: composed of merchandise trade account (exports less imports), services trade account (income from international capital investments, tourism, transportation and insurance) and transfer payments (gifts and foreign aid). Private capital account: summarizes transactions in real and financial assets and foreign activities of U.S. banks. Official settlements account: summarizes net changes in official holdings of international reserve assets. Page 338
Page 341 The U.S. began running a current account deficit in the mid-1980s as a result of a growing merchandise trade deficit. Inflows of private capital were used to pay for this deficit. Private capital account Current account
Page 345 Only 25 countries, including the U.S., Japan and Canada allow their currencies to float independently. Most countries peg or “fix” their Currency relative to another currency, basket of currencies or SDRs.
Page 347 Rates are determined by forces affecting the supply and demand for currencies on the foreign exchange market.
Page 348 An increase in the demand for dollars as U.S. interest rates rise, indicating here that it takes 4 euros to buy a dollar rather than 3 euros. E 5 E 4 E 3 E 2 E 1 Exchange rate (Euros/dollars)
Page 349 A trade deficit causes an increase in the supply of dollars on currency markets, thereby weakening the dollar and lowering the exchange rate from 3 euros per dollar to 2 euros Exchange rate (Euros/dollars)
Page 351 When the dollar rises, exports fall, and when the dollar declines, exports rise.
Page 352 An increase in the value of the dollar makes Our exports more expensive to client nations.
Summary <ul><li>Exchange rates have an impact on U.S. agricultural trade. </li></ul><ul><li>The value of foreign currencies is determined in the foreign exchange market. </li></ul><ul><li>Balance of payments is a link between international trade, capital flows and exchange rates. </li></ul><ul><li>The international monetary system is called a managed float , where rates fluctuate within limits controlled by the International Monetary Fund or IMF . </li></ul>
Chapter 18 discusses the reasons why nations trade ….