ECON 20 Lecture Notes - Lecture 23: Mexican Peso, Japanese Yen, Japanese Currency
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What are exchange rates? Depreciation and appreciation of Currencies
● Some definitions:
o The exchange rate between the Mexican Peso and the U.S. Dollar reflects simply how
many pesos it takes to buy one dollar.
o Depreciation: the value of a country’s currency falls relative to another currency.
o Appreciation: the value of a country’s currency rises relative to another currency.
● If the dollar appreciates relative to the Yen (Japanese currency), then Japanese goods become
cheaper for the U.S. Similarly, U.S. goods will become more expensive for Japan.
● Example: Prof. Fazzari’s pizza eating adventures in Italy.
o He visited Italy in June 2001 and got pizza. The pizza cost 9 Euros (€ 9); the
exchange rate at the time was 0.893 $/€. This means that it takes 0.893 dollars to buy
o The cost of pizza in dollars was: (€ 9) x (0.893 $/€) = $8.04
o In 2004, he went back to Italy. The pizza still cost € 9. The exchange rate was 1.215
$/€ then, however. This means it takes 1.215 dollars to buy one Euro.
o The cost of pizza in dollars was: (€ 9) x (1.215 $/€) = $10.94.
o Therefore, although the price in Euros stayed the same between the two trips, the
relative price for Prof. Fazzari increased because the exchange rate changed. Because
the dollar depreciated, it took more dollars to equal € 9.
o Note: An equivalent exchange rate for 1.215 $/€.is 0.823 €/$. This means that
“0.823 Euros equal one dollar” is equivalent to “1.215 dollars equal one Euro.”
● This example shows that Italian goods got more expensive for the U.S. because the dollar
depreciated relative to the Euro. Now, let’s see what happens from Italy’s perspective.
o An Italian buys a U.S. PC system that costs $1200 in 2001, when the exchange rate
was 1.120 €/$. How much in Euros does the PC cost?
Answer: $1200 * 1.120 €/$ = € 1344
o In 2004, when the exchange rate is 0.823 €/$, the PC would cost:
$1200 * 0.823 €/$ = € 987.6
o Just as Italian goods became more expensive for the U.S. when the dollar appreciates,
so do U.S. goods become cheaper for Italy when the Euro appreciates.
● Here is a short and useful supplement compiled by an earlier note taker:
o The exchange rate between the dollar and the Japanese Yen fluctuated quite a bit in
the late 1990s. Exchange rates were between 100 ¥/$ and 140 ¥/$