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Iznos inozemne valute
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E
E the equilibrium exchange rate;
3. Determination of Exchange Rate
Supply of foreign exchange:
supply of foreign exchange refers to the amount of foreign exchange
that will be offered to the market at various exchange rates, all other
factors held constant.
Supply of foreign exchange results from credit (active) transactions of
the balance of payments, such as:
export of goods,
export of services,
unilateral transfers from abroad,
income from investment,
inflow of foreign capital;
supply schedule has a positive slope, because supply increases when the
exchange rate increases;
3. Determination of Exchange Rate
Demand for foreign exchange:
Demand for foreign exchange is derived from debit (passive)
transactions of the balance of payments, such as:
import of goods,
import of services,
unilateral transfers from a country,
income of foreign investment,
outflow of capital;
demand schedule has a negative (declining) slope, because it varies
inversely with the exchange rate;
3. Determination of Exchange Rate
Two components:
par value relation of the domestic currency to some conventional
common denominator (gold, dollar or SDR); the external value of a
currency;
purchasing power parity - value of a currency expressed in the quantity
of goods that could be buy for an unit of the currency; internal value of a
currency;
3. Determination of Exchange Rate
Terms depreciation and devaluation as well as appreciation and
revaluation are not synonyms:
depreciation a real decrease in a currency value; decreasing of
its internal value (purchasing power);
appreciation a real increase in a currency value; increasing of
its internal value (purchasing power);
devaluation an official reduction of a currency value
(reduction of the external value - par value) by a formal act of
monetary authorities;
revaluation an official increasing of a currency value
(increasing of the external value par value) by a formal act of
monetary authorities;
3. Determination of Exchange Rate
depreciation/devaluation weakening of domestic currency (increase
of exchange rate) domestic goods cheaper for foreigners increase
in export
appreciation/revaluation strengthening of domestic currency (decline
of exchange rate) domestic goods more expensive for foreigners
increase in import
3. Determination of Exchange Rate
Quotation Change in
exchange rate
Apreciation/
Revaluation
Depreciation/
Devaluation
Direct
quotation
ER foreign
currency
domestic
currency
ER domestic
currency
foreign
currency
Indirect
quotation
1/ER domestic
currency
foreign
currency
1/ER foreign
currency
domestic
currency
3. Determination of Exchange Rate
the real (equilibrium) exchange rate stimulates a rational allocation of
resources and shows level of competitiveness of a country;
overvalued currency:
official value (par value) > purchasing power
makes import cheaper, stimulates import and consumption; works
inflatory;
method of correction devaluation;
undervalued currency:
official value (par value) < purchasing power
makes domestic goods cheaper for foreigners thus stimulates export
and allocation of resources towards export industries;
method of correction revaluation;
4. Conclusion
A prominent interdependence exists between balance of payments
accounts and exchange rate.
Exchange rate is a price of one currency (a reference currency) in terms
of another currency (a base or accounting currency).
Exchange rates could be quoted directly or indirectly.
Exchange rates are determinated in the foreign exchange market by
supply and demand conditions.
Depreciation/devaluation means decrease in a currency value, and
apreciation/revaluation means increase in a currency value.
http://www.youtube.com/watch?v=xwtgByffoUw
5. Literature
Carbaugh Robert, International Economics, Eighth Edition, South-Western,
2002
Kovaevi Radovan, Meunarodne finansije, Ekonomski fakultet Univerziteta u
Beogradu, Beograd, 2011.
Krugman Paul, Maurice Obstfeld, International Economics: Theory and Policy,
8th Edition, Prevod, MATE, Zagreb, 2009.
Salvatore Dominick, International Economics, Ninth Edition, Wiley, 2007
Stojanov Dragoljub, Meunarodne finansije u globalnoj ekonomiji, IV
izmijenjeno i dopunjeno izdanje, Ekonomski fakultet u Sarajevu, Sarajevo, 2000.
Literature, Lessons for Exam and Essay Questions
Literature:
Paul Krugman, Maurice Obstfeld, International Economics Theory
and Policy, Seventh Edition;
Slides;
Lessons for Exam:
pp. 306-334.; slides;
Essay Questions:
Exchange Rate and Foreign Exchange Market
Exchange Rate Regimes
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