Foreign exchange rate determination and its detail

1. Assignment on
Unit – 5
Macro Economics and policy
FOREIGN EXCHANGE RATEDETERMINATION
Submitted to :
Dr. Y. C. Zala
Principle & Dean
college of IABM
AAU Anand - 388110
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Submitted by :
Sondarva Yagnesh m
Reg. no. 04-2664-2015
M.Sc. (Agri.) 1st Sem.

2. FOREIGN EXCHANGE
RATEDETERMINATION
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3. Foreign Exchange Rate
 What is Exchange Rate ?
 Exchange Rate is a rate at which one currency can be
exchanged into another currency.
In other words it is value one currency in terms of other.
say:
US $ 1 = Rs.45.18
This rate is the conversion rate of every US $ 1 to Rs.
45.18

4. Factors Determining Exchange Rates
(a). Fundamental Reasons:
- Balance of Payment – surplus leads to stronger currency.
- Economic Growth Rates –High/Low growth rate.
- Fiscal / Monetary Policy- deficit financing leads to depreciation of currency.
- Interest Rates –currency with higher interest will appreciate in the short term.
- Political Issues –Political stability leads to stable rates
(b). Technical Reasons
- Government Control can lead to unrealistic value.
- Free flow of Capital from lower interest rate to higher
interest rates.
(c). Speculation – higher the speculation higher the volatility in rates

5. What Determines Exchange Rates?
 Factors that cause the supply and demand
schedules of currencies to change
 Market fundamentals (economic variables)
 Productivity, inflation rates, real interest rates, consumer
preferences, and government trade policy
 Market expectations
 News about future market fundamentals
 Traders’ opinions about future exchange rates
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6. What Determines Exchange Rates
 Factors affecting exchange rates
 Short term: transfers of assets
 Differences in real interest rates and to the shifting
expectations of future exchange rates
 Interim: cyclical factors
 Fluctuations in economic activity
 Long term: flows of goods, services, and
investment capital
 Inflation rates, investment profitability, consumer
tastes, productivity, and government trade policy
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7. Determining Long-Term
Exchange Rates
 Exchange rate changes
Reactions of traders in the foreign-
exchange market to changes in
Relative price levels
Relative productivity levels
Consumer preferences for domestic or
foreign goods
Trade barriers
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8. Determining Long-Term
Exchange Rates
 Increase in the U.S. price level relative to
price levels in other countries
Increase in the demand for foreign currency
Decrease in the supply of foreign currency
Depreciation of the dollar
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9. Determining Long-Term
Exchange Rates
 U.S. productivity growth is faster than that of
other countries
Increase in the supply of foreign currency
Decrease in the demand for foreign currency
Appreciation of the dollar
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10. Determining Long-Term
Exchange Rates
 An increased demand for U.S. exports
Appreciation of the dollar
 An increased demand for U.S. imports
Depreciation of the dollar
 U.S. imposes trade barriers
 Appreciation of the dollar
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16. International comparisons of GDP:
purchasing power parity
 Gross domestic product (GDP)
 Add up the market values of the goods and services its
economy produces
 Use market exchange rate
 Misleading: not all goods and services are traded in a
world market
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17. International comparisons of GDP:
purchasing power parity
 Exchange rates
Overstate the size of economies with relatively
high price levels
Understate the size of economies with relatively
low price levels
Subject to sizable fluctuations
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Comparing GDPs internationally, 2008: top 8
countries (billions of dollars)