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Exchange Rates and Agricultural Trade

Exchange Rates and Agricultural Trade. Chapter 17. Discussion Topics. Exchange rates and the foreign exchange market Exchange rate determination Exchange rates and U.S. agricultural trade. Exchange Rate Defined.

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Exchange Rates and Agricultural Trade

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  1. Exchange Rates and Agricultural Trade Chapter 17

  2. Discussion Topics • Exchange rates and the foreign exchange market • Exchange rate determination • Exchange rates and U.S. agricultural trade

  3. Exchange Rate Defined • Exchange rate: The no. of units of foreign currency (i.e., Mexican peso) required to obtain 1 unit of domestic currency (i.e. U.S. $) • Reciprocal of this rate: No. of units of domestic currency required to obtain 1 unit of foreign currency • Value of domestic currency relative to foreign currency (i.e., value of the $ relative to the £ or ¥) Page 335

  4. Exchange Rate Defined • 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

  5. Canadian dollar (per U.S. dollar) of 1.305 → 1.31 Canadian dollar exchanges for 1 U.S. dollar • British Pound (in U.S. dollars) of 1.82 → a British pound exchanges for almost $1.82 in U.S. currency Page 337

  6. Exchange Rate Determination • Only 25 countries, including the U.S., Japan and Canada allow their currencies to float independently • Determined by supply and demand for these currencies • Most countries peg or “fix” their currency relative to another currency or basket of currencies Page 345

  7. Exchange Rate Determination Demand for U.S. $ • Foreign demand for U.S. $ neg. sloped • Lower exchange rate → cheaper for EU to import U.S. goods/services • ↑ demand for U.S. $ to pay for imports • Supply of U.S. $ positively sloped • Higher exchange rate → Imports to U.S. relatively cheap • Convert $ to foreign currency, more $ available to market Supply of U.S. $ 5 4 3 Euros/$ Exchange Rate 2 1 10 30 40 20 50 Quantity of $ Traded (Mil./Day) Page 348

  8. Exchange Rate Impacts An increase in the value of the dollar (relative to the Yen) makes U.S. exports more expensive Page 352

  9. Exchange Rate Determination • Interest rate differentials across countries are a major factor affecting demand for currency • ↑ in U.S. interest rates relative to other countries • Foreign investors would transfer funds to the U.S. to generate higher returns → ↑ in demand for U.S. $ Page 348

  10. Exchange Rate Determination Supply of U.S. $ 1.5 1.4 1.3 U.S. $ Demand w/ ↑ in IR Euros/$ Exchange Rate 1.2 1.1 U.S. $ Demand 10 30 40 20 50 Quantity of $ Traded (Mil./Day) • An ↑ in demand for U.S. $ as U.S. interest rates ↑ • Exchange rate goes from 1.30 to 1.433 Euros/$ Page 348

  11. Exchange Rate Determination • Balance of Trade has an impact on exchange rates • U.S. trade deficit (U.S. imports > U.S. exports)→ exchange rate ↓ • U.S. exports become relatively cheap for other countries • U.S. imports of other countries goods become more expensive • U.S. exports will ↑ & U.S. imports will ↓ • →Approach balanced trade levels Page 348

  12. Exchange Rate Determination Supply of U.S. $ Supply of U.S. $ resulting from trade deficit 5 4 3 Euros/$ Exchange Rate 2 1 U.S. $ Demand 10 30 40 20 50 Quantity of $ Traded (Mil./Day) • Trade deficit → an ↑ in supply of U.S. $ on currency markets • → weakening of the U.S. $ • →↓ in exchange rate from 3 to 2 Euros/$ Page 348

  13. Exchange rate ↑→ exports tend to ↓ • Exchange rate ↓→ exports tend to ↑ Page 351

  14. Summary • Exchange rates have an impact on U.S. agricultural trade • The value of foreign currencies is determined in the foreign exchange market. • Exchange rates have a significant impact on our trade balance

  15. Chapter 18 discusses the reasons why nations trade….

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