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Exchange rates

Exchange rates. Definition of exchange rates. The price one currency in terms of another currency. Calculates how much foreign currency we can buy with $1 of NZ currency For example 1NZ$ is worth 50USc. Appreciation of the NZ$. Appreciation means the value of a currency has risen

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Exchange rates

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  1. Exchange rates

  2. Definition of exchange rates • The price one currency in terms of another currency. • Calculates how much foreign currency we can buy with $1 of NZ currency • For example 1NZ$ is worth 50USc.

  3. Appreciation of the NZ$ • Appreciation means the value of a currency has risen • Before appreciation 1NZ$ is worth 60USc

  4. Appreciation of the NZ$ • Appreciation means the value of a currency has risen • Before appreciation 1NZ$ is worth 60USc • After appreciation 1NZ$ is worth 75USc

  5. Effect on imports • If our currency appreciates (is worth more) we don’t need as much of it to pay for things we buy overseas. • This makes imports cheaper and we can afford to increase the amount we import.

  6. Effect on imports • If our currency appreciates (is worth more) we don’t need as much of it to pay for things we buy overseas. • This makes imports cheaper and we can afford to increase the amount we import.

  7. 1NZ$ worth 50USc basically means it will take 2NZ$ to buy 1US$. This means we double the US price to work out what we pay • 1NZ$ worth 1US$ basically means we pay the same as the US price

  8. Effect on exports • If our currency appreciates (is worth more) then it takes more foreign currency to buy our currency making our exports more expensive. • So foreigners look for cheaper goods from other countries and buy less of our exports.

  9. Effect on exports • If our currency appreciates (is worth more) then it takes more foreign currency to buy our currency making our exports more expensive. • So foreigners look for cheaper goods from other countries and buy less of our exports.

  10. 1NZ$ worth 50USc for an American means 1US$ worth 2NZ$. This means they get things for half the NZ price. • 1NZ$ worth 1US$ basically means they pay the same as the NZ price

  11. Summary so far

  12. Therefore…

  13. Other effects of appreciation • Imported goods become cheaper and this reduces pressure on prices and inflation • Local firms may lose customers if they can not lower their prices • Exporters try to lower costs to keep their prices down.

  14. More Kiwis travel overseas as our dollar buys more but less foreign tourists come here as their dollar buys less. • More Kiwis invest overseas as our dollar buys more and less foreigners invest here. • NZ firms earning profit overseas don’t get as much because the foreign currency is not worth as much.

  15. Appreciation Less exports More imports Less inflation Less arriving tourists More Kiwis travelling Less foreign investment in NZ More NZ investment overseas Lower returns for NZ firms earning profit overseas Depreciation More exports Less imports More inflation More arriving tourists Less Kiwis travelling More foreign investment in NZ Less NZ investment overseas Higher returns for NZ firms earning a profit overseas. Final summary

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