Unit 7 - Foreign Exchange (FOREX) (05/10/17)

Foreign Exchange (FOREX)

• The buying and selling of currency

- Ex. In order to purchase souvenirs in France, it is first necessary for Americans to sell their Dollars and buy Euros.

• Any transaction that occurs in the Balance of Payments necessitates foreign exchange
• The exchange rate (e) is determined in the foreign currency markets. 

Changes in Exchange Rates 

• Exchange rates (e) are a function of the supply and demand for currency. – An increase in the supply of a currency will decrease the exchange rate of a currency

Exchange Rates determinants

• Consumer Tastes

• Relative Income 

• Relative Price Level

• Speculation 

Exports and Imports

• Appreciation of the dollar causes American goods to be relatively more expensive and foreign goods to be relatively cheaper thus reducing exports and increasing imports 

• Depreciation of the dollar causes American goods to be relatively cheaper and foreign goods to be relatively more expensive thus increasing exports and reducing imports 

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