2. Deficit and Surplus
The current account is in deficit when the total value of goods and service
exported is less than the total value of goods and service.
X < M
The current acount is in surplus when the total value of goods and services
exported is greater than the total value of goods and service imported
X > M
3. Cause and Consequence of a Trade Deficit
• If a country has insuificient domestic resources it has to import lots of
goods and services.
• Poor organisation and production
• The value of the country currency makes the price of exports too high and
imports too low
4. The impact for all trade deficit factors
• Increasing debt
• Loss of sovereignty
• Fall in value of the currency
• Imports become more expensive
5. Cause and Consequence of a Trade Surplus
• Its exports are in strong demand in other countries
• Its exports are competitively priced
The benefits :
• resulting in higher profits.
• Able to build up reserves of foreign currency = invest in other countries
6. THE DRAWBACKS
Bussines activity is focussing on producing goods for exports at the expense
of producing goods for consumption in the home market
A trade surplus will lead to a rise in the value of countries’ currency
7. Exchange Rates
EXCHANGE RATES
• The rate of exchange is the price of one currency in terms
of another
• Rate of exchange is determined by demand and supply
8.
9. 10 The strongest Currency
• Here’s a quick recap of the 10 strongest currencies in the world:
• Kuwaiti Dinar – (1 KWD = 3.29 USD)
• Bahraini Dinar – (1 BHD = 2.65 USD)
• Omani Rial – (1 OMR = 2.60 USD)
• Jordanian Dinar – (1 JOD = 1.41 USD)
• Pound Stirling – (1 GBP = 1.26 USD)
• Gibraltar Pound – (1 GIP = 1.23 USD)
• Cayman Islands Dollar – (1 KYD = 1.20 USD)
• Euro – (1 EURO = 1.10 USD)
• Swiss Franc – (1 CHF = 1.01 USD)
• US Dollar
10. Reason why we need others Currency
• Trading Systems
• Travelling
• Investments
11. How the value of currency may rise:
• More demand abroad for home produced goods
• More payment received from abroad for home produced goods
• Supply of foreign currency increases
• Demand for your currency increases
12. How the value of currency may fall:
• Local demand for foreign goods increases
• More money paid for foreign goods
• Supply of home currency increases
• Demand for foreign currency increases
Reasons for Demand of Currency
• To pay for imports
• To save money in foreign financial institutions
• To invest in foreign firms
13. Exchange Rate & Prices
• When the currency of a country depreciates, the overseas prices of its exports fall and the home price
of its imports rise
• When the currency of a country appreciates, the overseas prices of its exports rises and the home
price of its imports falls
Reasons for Currency Fluctuations
• Changes in balance of payments on current account (X-M)
• Inflation
• Interest rates
• Price of Oil
• Speculation
14. The price of a nation’s currency in terms of another
currency.
An exchange rate thus has two components, the domestic
currency and a foreign currency.
For example our domestic currency is the Jamaican Dollars
(JMD) and the Foreign Currency can be United States
Dollars (USD) or Euros (EUR) just to name a few.
15. We will be exploring three types of Exchange Rates
which are:
1. Fixed Exchange Rate
2. Floating/Flexible Exchange Rate
3. Managed Float
16. This is where a Government maintains agiven exchange
rate over a period of time.
This could be for a few months or even years.
In order to maintain the exchange rate at the stated level
government uses fiscal and monetary policies to control
aggregate demand.
17. In a fixed exchange rate system the XR is set by the
government or central bank at a particular rate.
E.g. BBD to US 2:1.
The forces of supply and demand do not determine the rate.
The central bank holds reserves of US dollars and
intervenes in order to keep the exchange rate pegged at
that level known as the Official Rate.
18. The value of a currency is allowed to be
determined by the forces of demand and
supply on the foreign exchange market
There is no government intervention.
There is no government intervention.
19. Any change in supply or demand for acurrency will cause
a depreciation or appreciation in the exchange rate.
An increase in demand for the local currency causes it to
appreciate or rise.
However, if there is a greater demand for the foreign
currency the value of the local currency falls or depreciates
to the foreign currency.
20. This is where the currency is broadly
managed by the forces of demand and
supply but the government takes action to
influence the rate of change in the exchange
rate.
21. The Central Bank seeks to stabilize the exchange rate
within a predetermined range for a given period of time, but
DOES NOT FIX IT at any particular level. This allows for
policy makers the benefit of planning with some degree of
certainty, for the macroeconomic affairs of a country.
Central bank intervenes to smoothen out ups and downs in
the exchange rate of home currency to its own advantage.
22. The effects of changing foreign exchange rates
on the domestic economy an external economy
• A depreciation/devaluation
Deppreciation = a decrease in the international price of a currency caused by market
force
Devaluation = a decision by the government, to lower the international price of
currency
A fall in the value of the exchange rate will make exports cheaper, in terms of foreign
currencies, and imports more expensive, in terms of foreign currencies
23. An Appreciation/Revaluation
Appreciation = an increase in the international price of a currency caused by market
forces
Revaluation= a decision by the government to raise the international price of its
currency
A rise in the exchange rate will make exports more expensive in terms of foreign
currencies, and imports cheaper in terms of the domestic currency
24. Calculating depreciation
Ex.
In the year 2013, the UK Pound ( £ )was worth US $ 1.50. if the UK pound depreciates
by 10 per cent, the new exchange rate will be:
10% x US$ 1,50 = 0,15
So the UK Pound Depreciated US$ 1.50 – 0,15 = US$ 1.35
25. Calculating Apreciation
Ex.
In the year 2013, the UK Pound ( £ )was worth US $ 1.50. if the UK pound apreciates by 10
per cent, the new exchange rate will be:
10% x US$ 1,50 = 0,15
So the UK Pound Appreciated US$ 1.50 + 0,15 = US$ 1.65
UK £ 1 = US$ 1.65
26. Exercise
1. In the year 2010, the UK Pound ( £ )was worth US $
1.75. if the UK pound depreciates by 10 per cent, the
new exchange rate will be:
2 In the year 2011, the Euro was worth US $ 3.75 if the
Euro Apreciates by 12 per cent, the new exchange rate
will be:
27. Exercise
1. The exchange rate is
(a) the price of one currency relative to gold.
(b) the value of a currency relative to inflation.
(c) the change in the value of money over time.
(d) the price of one currency relative to another.
(e) all of the above.
2. Exchange rates are determined in
(a) the money market.
(b) the foreign exchange market.
(c) the stock market.
(d) the capital market.
(e) both (b) and (c) of the above.
28. 3. When the value of the British pound changes from $1.50 to $1.25, then
(a) the pound has appreciated and the dollar has appreciated.
(b) the pound has depreciated and the dollar has appreciated.
(c) the pound has appreciated and the dollar has depreciated.
(d) the pound has depreciated and the dollar has depreciated.
4. In April 2000, one U.S. dollar traded on the foreign exchange market for about 7.2 French francs.
Therefore, one French franc would have purchased about
(a) 4.10 U.S. dollars.
(b) 1.40 U.S. dollars.
(c) 0.41 U.S. dollars.
(d) 0.14 U.S. dollars.
5. If the dollar _____ from 1.0 European euros per dollar to 0.9 euros per dollar, the euro _____ from
1.0 dollar to 1.1 dollars per euro.
(a) appreciates; appreciates
(b) appreciates; depreciates
(c) depreciates; depreciates
(d) depreciates; appreciates
