Exchange rates | International Economics

This presentation will delve into the concept of exchange rate systems, exploring the different types and how they impact international trade and finance. We will discuss fixed, floating, and managed float exchange rate systems, providing examples and analysing their pros and cons. Gain a comprehensive understanding of exchange rate systems and their significance in the global economy.

1. EXCHANGE RATES
Economics

2. WHAT IS EXCHANGE RATE?
▪Exchange rate is the price of a currency in terms of
another currency, e.g. $1 = £500.
▪A currency normally has a multiple exchange rates,
e.g. dollar to pound, dollar to euro, dollar to yuan,
etc.

3. FOREIGN EXCHANGE MARKET
A market for the purchase and sale of foreign
currencies.

4. EXCHANGE RATE SYSTEMS
Floating exchange rate system.
Fixed exchange rate system.
Managed float exchange rate system.

5. FLOATING EXCHANGE RATE
SYSTEM
The exchange rate is allowed to change because of
the market forces of demand and supply.
The demand for and supply of a currency determine
its exchange rate in the market.
No government intervention is required.

6. FLOATING EXCHANGE RATE
DEPRECIATION
A fall in currency value against other currencies
(depreciation).
A fall in currency demand owing to less demand for a
country’s exports.
A rise is supply of domestic currency as more people
import goods from other countries.

7. DEPRECIATION: FALL IN DEMAND
Price of currency
Quantity of currency
P
1
P
2
Q
2 Q
1
S
1
E
2
D
2
D
1
E
1

8. DEPRECIATION: RISE IN SUPPLY
Q
2
S
1
E
1
Price of currency
Quantity of currency
P
1
P
2
D
1
Q
1
S
2
E
2

9. FLOATING EXCHANGE RATE
APPRECIATION
A rise in the value of a currency against other
currencies (appreciation).
A rise in demand for domestic currency owing to
more exports.
A fall in supply of currency owing to reduction in
importation.

10. APPRECIATION: RISE IN DEMAND
Price of currency
Quantity of currency
P
2
P
1
Q
1 Q
2
S
1
E
1
D
1
D
2
E
2

11. APPRECIATION: FALL IN SUPPLY
Q
1
S
2
E
2
Price of currency
Quantity of currency
P
2
P
1
D
1
Q
2
S
1
E
1

12. FIXED EXCHANGE RATE
SYSTEM
The government maintains a fixed value for a
currency against other currencies.
Stability, but if too high, reduces exports.
Needs support from government using reserves of
foreign currencies.

13. FIXED EXCHANGE RATE:
INTERVENTION
S
1
Price of currency
Quantity of currency
P
1
P
2
S
2
D
2
D
1
Q
1 Q
2 Q
3

14. FIXED EXCHANGE RATE:
DEVALUATION & REVALUATION
▪Government may decide to lower the value of its
currency against other currencies (devaluation).
▪It may also raise the exchange rate of domestic
currency against other currencies (revaluation).

15. MANAGED FLOAT EXCHANGE
RATE SYSTEM
A combination of both floating and fixed exchange
rate systems.
The government selects upper and lower limits for
the exchange rate.
The government only intervenes when a change in
demand or supply will make the exchange rate higher
than the upper limit or lower than the lower limit.