module the foreign exchange market krugman's macroeconomics for ap* 42 margaret ray and david...

ModuleThe ForeignExchangeMarket

KRUGMAN'SMACROECONOMICS for AP*

42

Margaret Ray and David Anderson

What you will learnWhat you will learn

in thisin this ModuleModule::

• The role of the foreign exchange market and the exchange rate

• The importance of real exchange rates and their role in the current account

Understanding Exchange RatesUnderstanding Exchange Rates

•Foreign Exchange Market

•Exchange Rates

•Appreciate

•Depreciate

US $ JP ¥ €

$1.00 1 94.2 0.7479

¥1 0.0106 1 .0079

€1.00 1.337 125.6 1

The Equilibrium Exchange RateThe Equilibrium Exchange Rate

• FOREX follows laws of supply & demand

•Equilibrium Exchange Rate

Inflation and Real ExchangeInflation and Real Exchange Rates Rates

•Real Exchange Rates

•Nominal Exchange Rates

•Real Exchange Rate and the Current Account

Current Account - The difference between a nation's total exports of goods, services and transfers, and

its total imports of them.

Current Account - The difference between a nation's total exports of goods, services and transfers, and

its total imports of them.

Purchasing Power ParityPurchasing Power Parity

•Purchasing Power Parity (PPP)

•Big Mac Index

•Nominal Exchange Rates and PPP

Table 42.1 Exchange Rates, April 30, 2010, 9:40 A.M.Ray and Anderson: Krugman’s Macroeconomics for AP, First

EditionCopyright © 2011 by Worth Publishers

Figure 42.1 The Foreign Exchange MarketRay and Anderson: Krugman’s Macroeconomics for AP, First

EditionCopyright © 2011 by Worth Publishers

Table 42.2 Equilibrium in the Foreign Exchange Market: A Hypothetical Example

Ray and Anderson: Krugman’s Macroeconomics for AP, First EditionCopyright © 2011 by Worth Publishers

Figure 42.2 An Increase in the Demand for U.S. DollarsRay and Anderson: Krugman’s Macroeconomics for AP, First Edition

Copyright © 2011 by Worth Publishers

Table 42.3 Effects of Increased Capital InflowsRay and Anderson: Krugman’s Macroeconomics for AP,

First EditionCopyright © 2011 by Worth Publishers

Figure 42.3 Real versus Nominal Exchange Rates, 1990–2009

Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition

Copyright © 2011 by Worth Publishers

Figure 42.4 Purchasing Power Parity versus the Nominal Exchange Rate, 1990–2008

Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition

Copyright © 2011 by Worth Publishers

Unnumbered Figure 42.1 Low-Cost AmericaRay and Anderson: Krugman’s Macroeconomics for AP, First

EditionCopyright © 2011 by Worth Publishers