Professional Documents
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Exchange Rates
19-1
19-2
Exchange Rates
Exchange Rates
19-3
19-4
Exchange Rates
Exchange Rates
19-6
Exchange Rates
Exchange Rates
e = enom P/PFor
19-8
Exchange Rates
Exchange Rates
In a flexible-exchange-rate system:
When enom falls, the domestic currency has become
weaker and has undergone a nominal depreciation .
When enom rises, the domestic currency has become
stronger and has undergone a nominal appreciation.
19-10
Exchange Rates
Exchange Rates
In a flexible-exchange-rate system:
In a fixed-exchange-rate system:
19-11
19-12
Exchange Rates
Exchange Rates
In a fixed-exchange-rate system:
19-13
19-14
Exchange Rates
Exchange Rates
P = PFor/enom
PPP holds in the long run but not in the short run.
19-15
19-16
Exchange Rates
Exchange Rates
19-18
Exchange Rates
Exchange Rates
enom/enom = For
19-19
19-20
Exchange Rates
McParity:
As a test of the PPP hypothesis, the Economist
magazine periodically reports on the prices of Big
Mac hamburgers in different countries.
In 2006, the prices, when translated into dollar
terms using the nominal exchange rate, range from
just over $1 in China to over $5 in Switzerland, so
PPP definitely doesnt hold.
19-21
19-22
Exchange Rates
Exchange Rates
McParity:
19-23
19-24
Exchange Rates
Exchange Rates
19-26
Exchange Rates
Exchange Rates
19-27
19-28
The J Curve
Exchange Rates
The real exchange rate and net exports:
The J curve effect:
Our analysis assumes a time period long enough that the
movements along the J curve are complete.
Thus, a real depreciation raises net exports and a real
appreciation reduces net exports.
19-29
19-30
Exchange Rates
The value of the dollar and U.S. net exports:
This theory suggests that the value of the dollar
and U.S. net exports should be inversely related.
Data since the early 1970s, when the world
switched to floating exchange rates, confirms the
theory, at least in the 1980s.
19-31
19-32
Exchange Rates
Exchange Rates
19-34
Exchange Rates
19-35
19-36
P$ or enom
19-38
19-39
19-40
10
19-41
19-42
19-43
19-44
11
P$ or enom
Q$
19-45
19-46
19-48
12
19-50
19-51
19-52
13