Chapter 26 - Exchange rates, international trade, and capital flows. When you finish this chapter, you should be able to: Define the nominal exchange rate and use supply and demand to analyze how the nominal exchange rate is determined in the short run, distinguish between fixed and flexible exchange rates and discuss the advantages and disadvantages of each system, define the real exchange rate and show how it is related to the prices of goods across pairs of countries, | Exchange Rates, International Trade, and Capital Flows Chapter 26 McGraw-Hill/Irwin Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved. Learning Objectives Define the nominal exchange rate and discuss the advantages and disadvantages of flexible versus fixed exchange rates Use supply and demand to analyze how the nominal exchange rate is determined in the short run Define the real exchange rate, summarize the law of one price, and understand how purchasing power parity determines the long-run real exchange rate Use the relationship between domestic saving and the trade balance to understand how domestic saving, the trade balance, and net capital inflows are related Analyze the factors that determine international capital flows and how these flows affect domestic saving and the domestic interest rate The International Economy Every day, news draws our attention to the global economy The . sub-prime mortgage crisis of 2007 – 2008 quickly became a worldwide event because of the trade in mortgage securities Since the mid 1980s, international trade has grown twice as fast as world GDP Changing trade patterns have reduced the sensitivity of foreign economies to events in the . Innovations in transportation and communication can make events abroad an immediate issue worldwide Importance of Exchange Rates Domestic purchases are made with local currency Purchasing goods abroad requires converting your local currency to their local currency The exchange rate measures the rate of conversion Exchange rates are set in the foreign exchange market, with a small number of exceptions Rates are determined by supply and demand Affect the value of imported goods and the value of financial investments made across borders Changes in exchange rates can have a significant effect on most economies Nominal Exchange Rates The nominal exchange rate is the rate at which two currencies can be traded for each other Rates for July 5, 2013 Foreign Currency / Dollar Dollar | Exchange Rates, International Trade, and Capital Flows Chapter 26 McGraw-Hill/Irwin Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved. Learning Objectives Define the nominal exchange rate and discuss the advantages and disadvantages of flexible versus fixed exchange rates Use supply and demand to analyze how the nominal exchange rate is determined in the short run Define the real exchange rate, summarize the law of one price, and understand how purchasing power parity determines the long-run real exchange rate Use the relationship between domestic saving and the trade balance to understand how domestic saving, the trade balance, and net capital inflows are related Analyze the factors that determine international capital flows and how these flows affect domestic saving and the domestic interest rate The International Economy Every day, news draws our attention to the global economy The . sub-prime mortgage crisis of 2007 – 2008 quickly became a worldwide event .
