ECON 1010 Lecture Notes - Lecture 6: Financial Capital, Foreign Exchange Market, Capital Accumulation

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ultramarinesea-lion455

20 Nov 2017

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The exchange rate and the balance of payments. 10:40 am: to buy goods and services produced in another country we need money of that country. Foreign bank notes, coins, and bank deposits are called foreign currency. Like all prices, an exchange rate is determined in a market the foreign exchange market: the canadian dollar is demanded and supplied by thousands of traders every hour of every day. So the fa(cid:272)tors that i(cid:374)flue(cid:374)(cid:272)e the de(cid:373)a(cid:374)d for ca(cid:374)adia(cid:374) dollars also influence the supply of canadian dollars, e. u. euros, u. k. pounds, and japanese (cid:455)e(cid:374). Interest rates in the united states and other countries: the expected future exchange rate, the law of demand for foreign exchange: the demand for dollars is a derived demand. People buy canadian dollars so that they can buy canadian-produced goods and services or. But expected profit depends on the e(cid:454)(cid:272)ha(cid:374)ge rate.

Related Questions

Foreign exchange markets make it possible for trade to be enacted between countries without lengthy negotiations on trade terms. The exchange rate mechanism is a relatively stable process whereby different currencies can be exchanged in an orderly manner in conformity to the rules of currency exchange rates. Factors, such as the relative inflation and unemployment rates between the trading partners, affect the value of each country's currency in relation to the other countries' currency. The country with higher inflation and unemployment will have the lower valued currency.

(A.) Why is the foreign currency exchange market important to a business?

(B.) What is the benefit of the foreign currency exchange market to the U.S. company?

(C.) If the U.S. currency is decreasing versus other currencies of countries it trades with, how will that affect the U.S. company? If the reverse is true, how will that affect the US company?

orchiddonkey965

Just as with the price of a good, the price, or exchange rate, of a currency is determined by supply and demand. However, rather than using a traditional supply and demand analysis as shown in Marthinsen, currency traders often consider whether foreign funds will flow into or out of a country as a result of a particular economic circumstance. If foreigners wish to make domestic purchases or investments, the foreign currency must first be exchanged for the domestic currency. Thus, foreign funds flowing into a country increase the demand for the domestic currency and it appreciates. Funds flowing out reverse this process leading to depreciation of the domestic currency. In the table, place an X to indicate whether each economic condition will cause foreign funds to flow in or out of the country and whether the domestic currency will appreciate or depreciate.

Domestic circumstance	Funds flow in	Funds flow out	Currency appreciates	Currency depreciates
Real interest rates are higher than in other countries
Risk of civil war
Business taxes are raised above the world average				X
Expected stock market returns are better than elsewhere
Inflation increases
A large deposit of rare earth minerals is discovered
Rapidly growing manufacturing sector imports more foreign raw materials

ultramarinepug302

Just as with the price of a good, the price, or exchange rate, of a currency is determined by supply and demand. However, rather than using a traditional supply and demand analysis as shown in Marthinsen, currency traders often consider whether foreign funds will flow into or out of a country as a result of a particular economic circumstance. If foreigners wish to make domestic purchases or investments, foreign currency must first be exchanged for the domestic currency. Thus, foreign funds flowing into a country increase the demand for the domestic currency and it appreciates. Funds flowing out reverse this process leading to depreciation of the domestic currency. In the table, place an X to indicate whether each economic condition will cause foreign funds to flow in or out of the country and whether the domestic currency will appreciate or depreciate.

Domestic circumstance	Funds flow in	Funds flow out	Currency appreciates	Currency depreciates
Real interest rates are higher than in other countries
Risk of civil war
Business taxes are raised above world average
Expected stock market returns are better than elsewhere
Inflation increases
A large deposit of rare earth minerals is discovered
Rapidly growing manufacturing sector imports more foreign raw materials
World commodity prices (such as oil or grain) fall in a country that is a major commodity exporter
GDP increases
PI falls

orchidmosquito970

ECON 1010 Lecture Notes - Lecture 6: Financial Capital, Foreign Exchange Market, Capital Accumulation

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