key exam knowledge: exchange rates

Copyright © 2015 Active Educationpeped.org/economicinvestigations

Perfect CompetitionHow Markets Work


Exchange Rates


Exchange Rates - DefinitionThe price of one country’s currency expressed in terms of another.

Newspapers publish the value of the pound in terms of the Euro, the US dollar or a ‘basket of currencies.’

The exchange rate determines the price of imports and exports


Exchange Rate DepreciationDepreciation occurs if market forces cause the exchange rate to fall.

Depreciation will cause exports to become cheaper. Imports will become dearer in terms of the domestic currency.

Depreciation may be caused by a fall in demand for exports or because capital inflows have reduced. Whatever the cause, a reduction in demand for the currency will lead to a new equilibrium exchange rate (see below).


Depreciation


Depreciation

If there is an increase in demand for imports or a capital outflow the an increase in the supply of the currency will result as people want to buy foreign currency.


Depreciation


Appreciation

Currency may appreciate if foreign investors want to invest in the UK and buy pounds. If demand for UK exports increase demand will also rise


Appreciation


Exchange Rate SystemsThere are four principal exchange rate systems:

• Floating Exchange Rates• Fixed Exchange Rates• Managed Exchange Rates • Semi Fixed Exchange Rates


Floating Exchange Rates


Fixed Exchange Rates


Managed Exchange Rates


Semi-Fixed Exchange Rates