IE - Foreign Exchange Market (Lesson)

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Foreign Exchange Market

Introduction

InternationalEconomics_ForeignExchangeRateImage.png Currencies are traded in foreign exchange markets. The equilibrium price at which currencies are traded is called the exchange rate. An exchange rate is the rate at which the currency of one country is exchanged for the currency of another.

When Americans buy foreign goods, U.S. dollars are supplied in the foreign exchange market and the foreign currency is demanded. When foreigners buy U.S. goods, the foreign currency is supplied in foreign exchange markets and the U.S. dollar is demanded. A foreign exchange market determines the equilibrium exchange rate (price) and quantity of currency exchanged using the supply and demand curves for a currency.

Watch the video below to begin your study of foreign exchange markets.

  

 

Appreciation and Depreciation

InternationalEconomics_appdep.png A foreign exchange market determines the equilibrium exchange rate (price) and quantity of currency exchanged using the supply and demand curves for a currency.

An increase in the exchange rate for a currency (which can be caused by an increase in demand or a decrease in supply) is called appreciation of that currency. When a currency appreciates, it is said to have strengthened.

For example, if the exchange rate increases in the market for dollars, it means that it takes more of the foreign currency to purchase a dollar. This means that a dollar can buy more of the foreign currency.

A decrease in the exchange rate for a currency (which can be caused by a decrease in demand or an increase in supply) is called depreciation of that currency. When a currency depreciates, it is said to have weakened.

For example, if the exchange rate decreases in the market for dollars, it means that it takes less of the foreign currency to purchase a dollar. This means it takes more dollars to buy the foreign currency.

Appreciation or depreciation of a currency changes the price of imports and exports. When a country’s currency appreciates, it is more expensive for foreigners to buy the country’s exports and it is cheaper for the country to buy imports. When a country’s currency depreciates, it is cheaper for foreigners to buy the country’s exports and it is more expensive for the country to buy imports. Appreciation and depreciation of a currency will affect the economy because they affect net exports.

Watch the presentation below to learn more about exchange rates.

 

But Why?

People purchase a country’s currency for two quite different reasons: to purchase goods or services in that country, or to purchase the assets of that country—its money, its capital, its stocks, its bonds, or its real estate. Both of these motives must be considered to understand why demand and supply in the foreign exchange market may change.

Watch the video below to learn about exchange rates.

  

 

Review

Review what you have learned by completing the activity below.

 

What is a Bitcoin?

What's Your takeaway? Icon Bitcoin is a digital and global money system currency. It allows people to send or receive money across the internet, even to someone they don't know or don't trust. Money can be exchanged without being linked to a real identity. The mathematical field of cryptography is the basis for Bitcoin's security.

A Bitcoin address, or simply address, is an identifier of 26-35 alphanumeric characters, beginning with the number 1 or 3, that represents a possible destination for a bitcoin payment. Addresses can be generated at no cost by any user of Bitcoin. For example, using Bitcoin Core, one can click "New Address" and be assigned an address. It is also possible to get a Bitcoin address using an account at an exchange or online wallet service.

 

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