ECON 102 Lecture Notes - Lecture 24: Exchange Rate, United States Dollar, Aggregate Demand
Econ 101
Principles of Microeconomics
Fall 2019
● Prices of international transactions
○ Real and nominal exchange rates
○ Nominal exchanges rates
■ DEF: nominal exchanges rates – the rate at which a person can trade the
currency of one country for the currency of another
■ The exchange rate (fx rate) can be expressed in 2 ways
● Example: 80 yen per U.S. dollar
● This can also be written as 1/80 of a dollar or 0.0125 dollars per
yen
■ DEF: appreciation – an increase in the value of a currency as measured by
the amount of foreign current it can buy
■ DEF: depreciation – a decrease in the value of a currency as measured by
the amount of foreign currency it can buy
■ When a currency appreciates, it is said to strengthen; when a currency
depreciates, it is said to weaken
■ When economists study exchange rates, they often use an exchange rate
index which converts the many nominal exchange rates into a single
measure
○ The real exchange rate
■ DEF: real exchange rate – the rate at which a person can trade the goods
and services of one country for the goods and services of another
■ Example: A bushel of American rice sells for $100 and a bushel of
Japanese rice sells for 16,000 yen. The nominal exchange rate is 80 yen
per dollar.
■ The exchange rate depends on the nominal exchange rate and on the prices
of goods and services in the 2 countries measured in local currency: real
exchange rate = (nominal exchange rate) x (domestic price) / (foreign
price)
■ In our example,
real exchange rate for a bushel of American rice = 80 yen/dollar x 100
dollar / 16,000 yen/bushel of Japanese rice
real exchange rate for a bushel of American rice = 8,000 yen / 16,000 yen
per bushel of Japanese rice
real exchange rate for a bushel of American rice = ½ bushel of Japanese
rice
■ The exchange rate is a key determinant of how much a country exports
and imports
■ When studying the economy as a whole, macroeconomists focus on
overall prices instead of individual prices of goods and services
● Price indexes are used to measure the overall price levels
Document Summary
Def: nominal exchanges rates the rate at which a person can trade the currency of one country for the currency of another. The exchange rate (fx rate) can be expressed in 2 ways. This can also be written as 1/80 of a dollar or 0. 0125 dollars per yen. Def: appreciation an increase in the value of a currency as measured by the amount of foreign current it can buy. Def: depreciation a decrease in the value of a currency as measured by the amount of foreign currency it can buy. When a currency appreciates, it is said to strengthen; when a currency depreciates, it is said to weaken. When economists study exchange rates, they often use an exchange rate index which converts the many nominal exchange rates into a single measure. Def: real exchange rate the rate at which a person can trade the goods and services of one country for the goods and services of another.